Question 1

Which of the following comparisons between short-term bank loans is correct?

Accepted Answer

A) Commercial paper interest rates are usually slightly higher than rates on bank loans. 
B) Commercial paper is only appropriate for firms requiring a limited amount of short-term financing,while banks can offer substantially larger amounts of funds. 
C) Banks demand that borrowers meet exacting credit-worthiness tests,while the lenders that purchase commercial paper are less strict.Only the most credit-worthy borrowers have access to bank loans. 
D) None of the above. 
A) Commercial paper interest rates are usually slightly higher than rates on bank loans. 
B) Commercial paper is only appropriate for firms requiring a limited amount of short-term financing,while banks can offer substantially larger amounts of funds. 
C) Banks demand that borrowers meet exacting credit-worthiness tests,while the lenders that purchase commercial paper are less strict.Only the most credit-worthy borrowers have access to bank loans. 
D) None of the above.

Question 2

Trade credit provides one of the most flexible sources of short-term financing available to the firm.

Accepted Answer

A) True 
 B)False

Question 3

Although CDs are slightly more risky than Treasury bills,the yield is usually slightly less.

Accepted Answer

A) True 
 B)False

Question 4

If ABC must have loan proceeds of $270,000,then it must borrow:

Accepted Answer

A) $270,000. 
B) $300,000. 
C) $410,000. 
D) $500,000. 
A) $270,000. 
B) $300,000. 
C) $410,000. 
D) $500,000.

Question 5

If Quick foregoes the discount but does not pay for its purchases until day 40,what is Quick's effective cost of using this source of credit? Assume that no penalty is incurred for late payment.

Accepted Answer

A) 38.37% 
B) 36.73% 
C) 26.67% 
D) 24.49% 
A) 38.37% 
B) 36.73% 
C) 26.67% 
D) 24.49%

Question 6

Typical securities in which firms invest their temporary cash surpluses include all of the following EXCEPT:

Accepted Answer

A) U.S.Treasury Bills. 
B) commercial paper. 
C) high quality corporate bonds. 
D) Money Market Mutual Funds. 
A) U.S.Treasury Bills. 
B) commercial paper. 
C) high quality corporate bonds. 
D) Money Market Mutual Funds.

Question 7

Commercial paper offers the borrower the same flexibility that exists when bank credit is used to meet financing needs.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following would NOT typically be used for assessing customer quality for purposes of granting trade credit?

Accepted Answer

A) Ratio analysis 
B) Aging of accounts receivable 
C) Credit scoring 
D) Credit rating services 
A) Ratio analysis 
B) Aging of accounts receivable 
C) Credit scoring 
D) Credit rating services

Question 9

The annual cost of not taking advantage of the 3/10,net 30 terms offered by a supplier is (hint: use $1.00 as the invoice amount and a 360-day year):

Accepted Answer

A) 55.7%. 
B) 45.4%. 
C) 32.3%. 
D) 28.2%. 
A) 55.7%. 
B) 45.4%. 
C) 32.3%. 
D) 28.2%.

Question 10

What factors should we consider when selecting a source of short-term credit?

Accepted Answer

A) Effective cost and availability 
B) Liquidity and profitability 
C) Historical trend analysis and liquidity 
D) None of the above 
A) Effective cost and availability 
B) Liquidity and profitability 
C) Historical trend analysis and liquidity 
D) None of the above

Question 11

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the dollar amount of interest Stoney River will need to pay? Assume a 360 day year.

Accepted Answer

A) $1,125,000 
B) $1,099,688 
C) $2,250,000 
D) 41,074,375 
A) $1,125,000 
B) $1,099,688 
C) $2,250,000 
D) 41,074,375

Question 12

Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

Accepted Answer

A) True 
 B)False

Question 13

Within the context of working capital management:

Accepted Answer

A) as the firm increases its investment in working capital,there is a corresponding increase in its profits. 
B) current liabilities provide a flexible means of financing the firm's fluctuating needs for assets. 
C) the use of current liabilities or short-term debt as opposed to long-term debt subjects the firm to less risk of illiquidity. 
D) all of the above. 
A) as the firm increases its investment in working capital,there is a corresponding increase in its profits. 
B) current liabilities provide a flexible means of financing the firm's fluctuating needs for assets. 
C) the use of current liabilities or short-term debt as opposed to long-term debt subjects the firm to less risk of illiquidity. 
D) all of the above.

Question 14

In general,the greater a firm's reliance upon short-term debt or current liabilities,the lower the:

Accepted Answer

A) liquidity. 
B) flexibility. 
C) certainty of interest costs. 
D) both A and C. 
A) liquidity. 
B) flexibility. 
C) certainty of interest costs. 
D) both A and C.

Question 15

The operating cycle can never be longer than the cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 16

According to the self-liquidating debt principle permanent assets should be financed with ________ liabilities.

Accepted Answer

A) permanent 
B) spontaneous 
C) current 
D) fixed 
A) permanent 
B) spontaneous 
C) current 
D) fixed

Question 17

Notes payable is a spontaneous source of financing.

Accepted Answer

A) True 
 B)False

Question 18

Commercial paper is an unsecured form of credit.

Accepted Answer

A) True 
 B)False

Question 19

Georgia Peaches Corporation (GPC)has a line of credit with Trust Company Bank that allows GPC to borrow up to $300,000 at an annual interest rate of 5.5%.However,GPC must keep a compensating balance of 20% of any amount borrowed on deposit at the Trust Company Bank.GPC does not normally have a cash balance account with the Trust Company.What is the effective annual cost of credit?

Accepted Answer

A) 6.875% 
B) 6.975% 
C) 7.075% 
D) 7.775% 
A) 6.875% 
B) 6.975% 
C) 7.075% 
D) 7.775%

Question 20

Which of the following is NOT a typical characteristic of money-market securities?

Accepted Answer

A) Little or no default risk 
B) Liquid,easily bought and sold 
C) Interest is not taxable at state or federal level 
D) Maturities less than 1 year 
A) Little or no default risk 
B) Liquid,easily bought and sold 
C) Interest is not taxable at state or federal level 
D) Maturities less than 1 year

Which of the following comparisons between short-term bank loans is correct?

Trade credit provides one of the most flexible sources of short-term financing available to the firm.

Although CDs are slightly more risky than Treasury bills,the yield is usually slightly less.

If ABC must have loan proceeds of $270,000,then it must borrow:

If Quick foregoes the discount but does not pay for its purchases until day 40,what is Quick's effective cost of using this source of credit? Assume that no penalty is incurred for late payment.

Typical securities in which firms invest their temporary cash surpluses include all of the following EXCEPT:

Commercial paper offers the borrower the same flexibility that exists when bank credit is used to meet financing needs.

Which of the following would NOT typically be used for assessing customer quality for purposes of granting trade credit?

The annual cost of not taking advantage of the 3/10,net 30 terms offered by a supplier is (hint: use $1.00 as the invoice amount and a 360-day year):

What factors should we consider when selecting a source of short-term credit?

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the dollar amount of interest Stoney River will need to pay? Assume a 360 day year.

Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

Within the context of working capital management:

In general,the greater a firm's reliance upon short-term debt or current liabilities,the lower the:

The operating cycle can never be longer than the cash conversion cycle.

According to the self-liquidating debt principle permanent assets should be financed with ________ liabilities.

Notes payable is a spontaneous source of financing.

Commercial paper is an unsecured form of credit.

Which of the following is NOT a typical characteristic of money-market securities?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

International Business Finance

Corporate Risk Management

Filters

Exam 18: Working Capital Management

Which of the following comparisons between short-term bank loans is correct?

Trade credit provides one of the most flexible sources of short-term financing available to the firm.

Although CDs are slightly more risky than Treasury bills,the yield is usually slightly less.

If ABC must have loan proceeds of $270,000,then it must borrow:

If Quick foregoes the discount but does not pay for its purchases until day 40,what is Quick's effective cost of using this source of credit? Assume that no penalty is incurred for late payment.

Typical securities in which firms invest their temporary cash surpluses include all of the following EXCEPT:

Commercial paper offers the borrower the same flexibility that exists when bank credit is used to meet financing needs.

Which of the following would NOT typically be used for assessing customer quality for purposes of granting trade credit?

The annual cost of not taking advantage of the 3/10,net 30 terms offered by a supplier is (hint: use $1.00 as the invoice amount and a 360-day year):

What factors should we consider when selecting a source of short-term credit?

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the dollar amount of interest Stoney River will need to pay? Assume a 360 day year.

Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

Within the context of working capital management:

In general,the greater a firm's reliance upon short-term debt or current liabilities,the lower the:

The operating cycle can never be longer than the cash conversion cycle.

According to the self-liquidating debt principle permanent assets should be financed with ________ liabilities.

Notes payable is a spontaneous source of financing.

Commercial paper is an unsecured form of credit.

Which of the following is NOT a typical characteristic of money-market securities?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

International Business Finance

Corporate Risk Management

Filters