Question 1

What is the average and maximum maturity of commercial paper?

Accepted Answer

The average and maxi

Question 2

Which of the following is not a specific financing option for temporary working capital?

Accepted Answer

A)  secured financing 
B)  commercial paper 
C)  bank loans 
D)  repurchase agreements 
A)  secured financing 
B)  commercial paper 
C)  bank loans 
D)  repurchase agreements

Question 3

The accounts receivable and inventory of a firm typically are used as collateral when issuing short-term secured financing.

Accepted Answer

A) True 
 B)False

Question 4

A firm issues two-month commercial paper with $1,000,000 face value and receives $985,000. What is the EAR the firm is paying for these funds?

Accepted Answer

A)  1.52% 
B)  7.50% 
C)  9.49% 
D)  15.00% 
A)  1.52% 
B)  7.50% 
C)  9.49% 
D)  15.00%

Question 5

Which of the following statements is FALSE?

Accepted Answer

A)  The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. 
B)  Following the matching principle should, in the long run, help minimize a firm's transaction costs. 
C)  In a perfect capital market, the choice of financing is irrelevant; thus how the firm chooses to finance its short-term cash needs cannot affect value. 
D)  A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks. 
A)  The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. 
B)  Following the matching principle should, in the long run, help minimize a firm's transaction costs. 
C)  In a perfect capital market, the choice of financing is irrelevant; thus how the firm chooses to finance its short-term cash needs cannot affect value. 
D)  A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A)  Because investment in permanent working capital is required so long as the firm remains in business, it constitutes a long-term investment. 
B)  Because temporary working capital represents a short-term need, the firm should finance this portion of its investment with short-term financing. 
C)  Temporary working capital is the difference between the lowest level of investment in short-term assets and the permanent working capital investment. 
D)  The matching principle states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds. 
A)  Because investment in permanent working capital is required so long as the firm remains in business, it constitutes a long-term investment. 
B)  Because temporary working capital represents a short-term need, the firm should finance this portion of its investment with short-term financing. 
C)  Temporary working capital is the difference between the lowest level of investment in short-term assets and the permanent working capital investment. 
D)  The matching principle states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds.

Question 7

A written, legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum, regardless of the financial condition of the firm (unless the firm is bankrupt) as long as the firm satisfies any restrictions in the agreement is called ________.

Accepted Answer

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

Question 8

Which of the following best describes the agreement where a firm sells receivables to a lender and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period, with the provision that the lender will receive payment from the borrower if the customers default on their payments?

Accepted Answer

A)  trust receipt 
B)  pledging of accounts receivable 
C)  factoring of accounts receivable with recourse 
D)  factoring of accounts receivable without recourse 
A)  trust receipt 
B)  pledging of accounts receivable 
C)  factoring of accounts receivable with recourse 
D)  factoring of accounts receivable without recourse

Question 9

Which of the following types of loan would be best for a lender who wishes to reduce risk by maintaining the tightest control over inventory?

Accepted Answer

A)  trust receipt 
B)  floating lien 
C)  field warehouse arrangement 
D)  public warehouse arrangement 
A)  trust receipt 
B)  floating lien 
C)  field warehouse arrangement 
D)  public warehouse arrangement

Question 10

What is permanent working capital?

Accepted Answer

Permanent working capital is t

Question 11

Luther Industries is offered a $1 million loan for four months at an APR of 9%. If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest-earning account, then the effective annual rate EAR for this loan is closest to ________.

Accepted Answer

A)  10.3% 
B)  12.6% 
C)  14.4% 
D)  71.5% 
A)  10.3% 
B)  12.6% 
C)  14.4% 
D)  71.5%

Question 12

Which of the following is a financing arrangement in which the lender's claim on the borrower's assets in the event of a default is limited to only explicitly pledged collateral?

Accepted Answer

A)  without recourse 
B)  with recourse 
C)  without factoring 
D)  with factoring 
A)  without recourse 
B)  with recourse 
C)  without factoring 
D)  with factoring

Question 13

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

Accepted Answer

Commitment fees are associated

Question 14

What is the maximum maturity of commercial paper?

Accepted Answer

A)  60 days 
B)  90 days 
C)  180 days 
D)  270 days 
A)  60 days 
B)  90 days 
C)  180 days 
D)  270 days

Question 15

Stuart Mining is offered a $4,000,000 line of credit for three months at an APR of 6%. The bank requires that the firm keep an amount equal to 10% of the loan principal in an account with the bank as long as the loan remains outstanding. This account pays 2% APR with quarterly compounding. What is the actual three-month interest paid on this loan?

Accepted Answer

A)  1.6% 
B)  6.6% 
C)  12.6% 
D)  14.6% 
E)  60.9% 
A)  1.6% 
B)  6.6% 
C)  12.6% 
D)  14.6% 
E)  60.9%

Question 16

Which of the following statements is FALSE?

Accepted Answer

A)  Regardless of the loan structure, the bank may include a compensating balance requirement in the loan agreement that reduces the usable loan proceeds. 
B)  A common type of fee is a loan origination fee, which a bank charges to cover credit checks and legal fees. 
C)  Firms frequently use lines of credit to finance seasonal needs. 
D)  The commitment fee associated with a committed line of credit is designed to decreases the effective cost of the loan to the firm. 
A)  Regardless of the loan structure, the bank may include a compensating balance requirement in the loan agreement that reduces the usable loan proceeds. 
B)  A common type of fee is a loan origination fee, which a bank charges to cover credit checks and legal fees. 
C)  Firms frequently use lines of credit to finance seasonal needs. 
D)  The commitment fee associated with a committed line of credit is designed to decreases the effective cost of the loan to the firm.

Question 17

Commercial paper is rated by credit rating agencies.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is FALSE?

Accepted Answer

A)  If a company anticipates an ongoing surplus of cash, it may choose to increase its dividend payout. 
B)  Seasonal sales can create large short-term cash flow deficits and surpluses. 
C)  The first step in short-term financial planning is to forecast the company's future net working capital. 
D)  Deficits resulting from investments in long-term projects are often financed using long-term sources of capital, such as equity or long-term bonds. 
A)  If a company anticipates an ongoing surplus of cash, it may choose to increase its dividend payout. 
B)  Seasonal sales can create large short-term cash flow deficits and surpluses. 
C)  The first step in short-term financial planning is to forecast the company's future net working capital. 
D)  Deficits resulting from investments in long-term projects are often financed using long-term sources of capital, such as equity or long-term bonds.

Question 19

ToysToys Corporation wants to borrow $500,000 for one month. It uses its inventory as collateral for a 16% (APR compounded monthly) loan, under a warehouse arrangement where the warehouse fee is $14,000, paid at the end of the month. What is the EAR of this loan for ToysToys?

Accepted Answer

A)  4.1% 
B)  15.4% 
C)  45.8% 
D)  62.6% 
A)  4.1% 
B)  15.4% 
C)  45.8% 
D)  62.6%

Question 20

Crimini Foods is offered a $400,000 line of credit for six months at an APR of 10%. This loan has a loan origination fee of 2%. What is the actual six-month interest rate paid, expressed as an EAR?

Accepted Answer

A)  7.14% 
B)  10.60% 
C)  11.03% 
D)  14.80% 
A)  7.14% 
B)  10.60% 
C)  11.03% 
D)  14.80%

Exam 20: Short-Term Financial Planning

What is the average and maximum maturity of commercial paper?

Which of the following is not a specific financing option for temporary working capital?

The accounts receivable and inventory of a firm typically are used as collateral when issuing short-term secured financing.

A firm issues two-month commercial paper with $1,000,000 face value and receives $985,000. What is the EAR the firm is paying for these funds?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A written, legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum, regardless of the financial condition of the firm (unless the firm is bankrupt) as long as the firm satisfies any restrictions in the agreement is called ________.

Which of the following types of loan would be best for a lender who wishes to reduce risk by maintaining the tightest control over inventory?

What is permanent working capital?

Luther Industries is offered a $1 million loan for four months at an APR of 9%. If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest-earning account, then the effective annual rate EAR for this loan is closest to ________.

Which of the following is a financing arrangement in which the lender's claim on the borrower's assets in the event of a default is limited to only explicitly pledged collateral?

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

What is the maximum maturity of commercial paper?

Which of the following statements is FALSE?

Commercial paper is rated by credit rating agencies.

Which of the following statements is FALSE?

ToysToys Corporation wants to borrow $500,000 for one month. It uses its inventory as collateral for a 16% (APR compounded monthly) loan, under a warehouse arrangement where the warehouse fee is $14,000, paid at the end of the month. What is the EAR of this loan for ToysToys?

Crimini Foods is offered a $400,000 line of credit for six months at an APR of 10%. This loan has a loan origination fee of 2%. What is the actual six-month interest rate paid, expressed as an EAR?

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

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