Question 1

What are loan origination fees and what effect does it have on the loan?

Accepted Answer

Banks charge a fee called loan origination fee to cover the costs of credit checks and legal fees. This fee is paid when the loan is initiated, thereby adding to the cost of borrowing.

Question 2

What do we understand by seasonality?

Accepted Answer

For many firms, sales are seasonal, i.e., they are not evenly distributed over all months but are concentrated in some months more than others. This is called seasonality of sales.

Question 3

General Manufacturing wants to borrow $1 million for three months. It uses its inventory as collateral for an 11% (APR compounded monthly) loan under a warehouse arrangement where the warehouse fee is $12,000 paid at the start of the three months. What is the EAR of this loan for General Manufacturing?

Accepted Answer

A)  2.8% 
B)  4.0% 
C)  17.1% 
D)  24.4% 
A)  2.8% 
B)  4.0% 
C)  17.1% 
D)  24.4% C

Question 4

Which of the following statements regarding commercial paper is FALSE?

Accepted Answer

A)  With dealer paper, dealers sell the commercial paper to investors in exchange for a spread (or fee) for their services. 
B)  With dealer paper, the spread increases the proceeds that the issuing firm receives, thereby decreasing the effective cost of the paper. 
C)  The minimum face value is $25,000, and most commercial paper has a face value of at least $100,000. 
D)  With direct paper, the firm sells the security directly to investors. 
A)  With dealer paper, dealers sell the commercial paper to investors in exchange for a spread (or fee) for their services. 
B)  With dealer paper, the spread increases the proceeds that the issuing firm receives, thereby decreasing the effective cost of the paper. 
C)  The minimum face value is $25,000, and most commercial paper has a face value of at least $100,000. 
D)  With direct paper, the firm sells the security directly to investors.

Question 5

DressUp! is a clothing retailer specializing in costumery. The financial forecast for a year is shown in the table above. All figures are in thousands of dollars. During which of the following months are the firm's working capital needs the greatest?

Accepted Answer

A)  April 
B)  June 
C)  September 
D)  October 
A)  April 
B)  June 
C)  September 
D)  October

Question 6

A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.

Accepted Answer

A) True 
 B)False

Question 7

Use the table for the question(s) below.
The quarterly working capital levels for Fancy Weddings Inc. are presented in the following table (in $ millions):
  
-In which quarter are Fancy's seasonal working capital needs the smallest?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
A)  1 
B)  2 
C)  3 
D)  4

Question 8

A firm has a committed line of credit with a maximum of $2.5 million and an interest rate of 9% (EAR) with a certain bank. The commitment fee is 0.65% (EAR). The firm borrows $2 million at the start of the year, and then repays it at the end of the year. What is the total cost of the loan?

Accepted Answer

A)  $180,000 
B)  $183,250 
C)  $193,000 
D)  $212,500 
A)  $180,000 
B)  $183,250 
C)  $193,000 
D)  $212,500

Question 9

What is the term used for a short-term, unsecured debt sold by a large company to an intermediary, who then resells the debt to investors in return for a fee for his or her services?

Accepted Answer

A)  commercial paper 
B)  direct paper 
C)  dealer paper 
D)  unsecured paper 
A)  commercial paper 
B)  direct paper 
C)  dealer paper 
D)  unsecured paper

Question 10

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR compounded monthly, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the beginning of the loan. What is Matt's EAR?

Accepted Answer

A)  5.5% 
B)  7.24% 
C)  0.58% 
D)  7.01% 
A)  5.5% 
B)  7.24% 
C)  0.58% 
D)  7.01%

Question 11

The prime rate is the rate banks charge all but their largest customers, who can negotiate a sub-prime rate.

Accepted Answer

A) True 
 B)False

Question 12

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR compounded monthly, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the end of the loan. What is Matt's EAR?

Accepted Answer

A)  5.5% 
B)  7.20% 
C)  0.58% 
D)  7.01% 
A)  5.5% 
B)  7.20% 
C)  0.58% 
D)  7.01%

Question 13

Conways Roofing Services is offered a $1 million line of credit for three months at an APR of 8%. The bank requires that the firm keep an amount equal to 12% of the loan principal in a non-interest-earning account with the bank as long as the loan remains outstanding. What is the actual three-month interest rate paid, expressed as an EAR?

Accepted Answer

A)  9.41% 
B)  24.40% 
C)  60.30% 
D)  80.40% 
A)  9.41% 
B)  24.40% 
C)  60.30% 
D)  80.40%

Question 14

The data above shows the net working capital requirements for Blunderstone Shoes, a company that makes waterproof boots. All figures are in thousands of dollars. What are Blunderstone's temporary working capital requirements in the third quarter?

Accepted Answer

A)  $2,700,000 
B)  $3,400.000 
C)  $5,450,000 
D)  $6,100,000 
A)  $2,700,000 
B)  $3,400.000 
C)  $5,450,000 
D)  $6,100,000

Question 15

Which of the following statements is FALSE?

Accepted Answer

A)  If a factoring arrangement is with recourse, the factor will pay the firm the amount due regardless of whether the factor receives payment from the firm's customers. 
B)  In a factoring of accounts receivable arrangement, the firm sells receivables to the lender (i.e., the factor), and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period. 
C)  Businesses can also obtain short-term financing by using secured loans, which are loans collateralized with short-term assets-most typically the firm's accounts receivables or inventory. 
D)  Both the interest rate and the factor's fee vary depending on such issues as the size of the borrowing firm and the dollar volume of its receivables. 
A)  If a factoring arrangement is with recourse, the factor will pay the firm the amount due regardless of whether the factor receives payment from the firm's customers. 
B)  In a factoring of accounts receivable arrangement, the firm sells receivables to the lender (i.e., the factor), and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period. 
C)  Businesses can also obtain short-term financing by using secured loans, which are loans collateralized with short-term assets-most typically the firm's accounts receivables or inventory. 
D)  Both the interest rate and the factor's fee vary depending on such issues as the size of the borrowing firm and the dollar volume of its receivables.

Question 16

Use the table for the question(s) below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):
  
-In which quarter are Hasbeen's seasonal working capital needs the smallest?

Accepted Answer

A)  1 
B)  2 
C)  3 
D)  4 
A)  1 
B)  2 
C)  3 
D)  4

Question 17

Which of the following best describes an aggressive financing policy?

Accepted Answer

A)  financing part or all of the permanent working capital with short-term debt 
B)  financing part or all of the permanent working capital with long-term debt 
C)  financing part or all of the temporary working capital with short-term debt 
D)  financing part or all of the temporary working capital with long-term debt 
A)  financing part or all of the permanent working capital with short-term debt 
B)  financing part or all of the permanent working capital with long-term debt 
C)  financing part or all of the temporary working capital with short-term debt 
D)  financing part or all of the temporary working capital with long-term debt

Question 18

Which of the following is NOT a reason why a firm would choose to follow an aggressive financing policy?

Accepted Answer

A)  to reduce sensitivity to the firm's credit quality 
B)  to reduce agency costs 
C)  to take advantage of lower interest rates 
D)  to reduce exposure to funding risk 
A)  to reduce sensitivity to the firm's credit quality 
B)  to reduce agency costs 
C)  to take advantage of lower interest rates 
D)  to reduce exposure to funding risk

Question 19

A company that makes decorations for Christmas trees has high sales in its fourth quarter but very low sales during the rest of the year. It manufactures decorations steadily throughout the year, however. Which of the following is NOT a likely consequence of this scenario?

Accepted Answer

A)  The firm will need sources of short-term cash to fund inventory in the second and third quarters. 
B)  The firm will see negative net cash flows in the second and third quarter. 
C)  The firm will have a large short-term surplus in the fourth quarter. 
D)  Accounts payables will rise from the first to fourth quarter. 
A)  The firm will need sources of short-term cash to fund inventory in the second and third quarters. 
B)  The firm will see negative net cash flows in the second and third quarter. 
C)  The firm will have a large short-term surplus in the fourth quarter. 
D)  Accounts payables will rise from the first to fourth quarter.

Question 20

A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called ________.

Accepted Answer

A)  a short-term mortgage loan 
B)  a single, end-of-period-payment loan 
C)  a bridge loan 
D)  a line of credit 
A)  a short-term mortgage loan 
B)  a single, end-of-period-payment loan 
C)  a bridge loan 
D)  a line of credit

Exam 20: Short-Term Financial Planning

What are loan origination fees and what effect does it have on the loan?

What do we understand by seasonality?

Which of the following statements regarding commercial paper is FALSE?

DressUp! is a clothing retailer specializing in costumery. The financial forecast for a year is shown in the table above. All figures are in thousands of dollars. During which of the following months are the firm's working capital needs the greatest?

A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.

Use the table for the question(s) below. The quarterly working capital levels for Fancy Weddings Inc. are presented in the following table (in $ millions): -In which quarter are Fancy's seasonal working capital needs the smallest?

A firm has a committed line of credit with a maximum of $2.5 million and an interest rate of 9% (EAR) with a certain bank. The commitment fee is 0.65% (EAR). The firm borrows $2 million at the start of the year, and then repays it at the end of the year. What is the total cost of the loan?

What is the term used for a short-term, unsecured debt sold by a large company to an intermediary, who then resells the debt to investors in return for a fee for his or her services?

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR compounded monthly, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the beginning of the loan. What is Matt's EAR?

The prime rate is the rate banks charge all but their largest customers, who can negotiate a sub-prime rate.

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR compounded monthly, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the end of the loan. What is Matt's EAR?

The data above shows the net working capital requirements for Blunderstone Shoes, a company that makes waterproof boots. All figures are in thousands of dollars. What are Blunderstone's temporary working capital requirements in the third quarter?

Which of the following statements is FALSE?

Use the table for the question(s) below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -In which quarter are Hasbeen's seasonal working capital needs the smallest?

Which of the following best describes an aggressive financing policy?

Which of the following is NOT a reason why a firm would choose to follow an aggressive financing policy?

A company that makes decorations for Christmas trees has high sales in its fourth quarter but very low sales during the rest of the year. It manufactures decorations steadily throughout the year, however. Which of the following is NOT a likely consequence of this scenario?

A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called ________.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters