Question 1

Which of the following elements of credit terms might discourage purchasers from paying with a discount?

Accepted Answer

A) A higher discount percentage with shorter payment period. 
B) A shorter payment period with longer discount period. 
C) A longer discount period with higher discount percentage 
D) A longer payment period with lower discount period.

Question 2

Which of the following financial ratios has the highest weight in Altman's Z score estimation?

Accepted Answer

A) Working capital/total assets 
B) Retained earnings/total assets 
C) EBIT/total assets 
D) Sales/total assets

Question 3

The "five C's of credit" represent a framework for analyzing credit risk.

Accepted Answer

A) True 
 B)False

Question 4

Extending trade credit can increase the probability of repeat orders.

Accepted Answer

A) True 
 B)False

Question 5

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of: 5/15, net 60.By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Accepted Answer

The answer of Calculate the implied cost of trade credit...

Question 6

Which of the following is not likely to be a characteristic of a numerical credit scoring system?

Accepted Answer

A) Used to prescreen credit applications 
B) Used shareholders' income tax returns 
C) Less subjective than using individual loan officers 
D) Most appropriate for consumer loans

Question 7

Xian Corporation predicts that if a customer pays on the first sale, it is assured that it is a reliable customer.As such, it expects that customer to generate a net profit of $700 per year for 10 years.Ajax calculates present value with a 9% rate of return.There is a 70% probability that Ajax will secure a reliable customer.However, if the customer defaults, Ajax will have to incur a loss of $800.Determine the expected benefit if credit is granted.

Accepted Answer

A) $2,804 
B) $2,904 
C) $3,004 
D) $3,104

Question 8

Which of the following typically justifies the offering of season dating?

Accepted Answer

A) The firm earns interest on the receivables 
B) Product demand is increased during the low-sales months of the year 
C) The firm is experiencing cash flow difficulties 
D) The firm develops repeat business

Question 9

Which of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

Accepted Answer

A) Take the discount but pay after the discount period. 
B) Borrow from the bank and take the discount. 
C) Ignore the discount, pay at the end of the period. 
D) Take the discount and hope for longer payment float.

Question 10

When sellers deliberately postdate an invoice by several months, their terms of sale include:

Accepted Answer

A) COD 
B) EOM 
C) CBD 
D) Season dating

Question 11

Consider a firm with the following financial ratios:
EBIT/total assets = .12
Sales/total assets = 1.4
Market equity/book debt = .9
Retained earnings/total assets = .4
Working capital/total assets = .12
What is the firm Z scorer?

Accepted Answer

The answer of Consider a firm with the following financial...

Question 12

Progress payments allow the customers to choose the payment schedule.

Accepted Answer

A) True 
 B)False

Question 13

Balsam Corporation is concerned about their current bad debt ratio of 9%.The CFO believes imposing a more stringent credit policy may reduce sales by 8% and reduce the bad debt ratio to 6%.If the cost of goods sold is 85% of the selling price, determine if the new policy should be undertaken.

Accepted Answer

A) Undertake; increase of 40% in profits 
B) Undertake; increase of 38% in profits 
C) Do not undertake; decrease of 36% in profits 
D) Do not undertake; decrease of 34% in profits

Question 14

Determine the annual effective rate of a customer that does not take advantage of credit terms of 2/10, n/30.

Accepted Answer

A) 38.59% 
B) 40.59% 
C) 42.59% 
D) 44.59%

Question 15

Which of the following changes to the terms of credit would make the effective annual rate increase?

Accepted Answer

A) Increase the cash discount percentage 
B) Extend the discount period 
C) Extend the payment period 
D) All of these changes will increase the effective rate

Question 16

Smith Corp.produces a product that generates repeat orders on an annual basis.Their product has a current price of $2,500 and a current cost of $2,100.They use a 15% opportunity cost of capital.Due to the product's high cost, there is a 17% chance that each new customer will default on payment.What is the expected profit and break-even probability from granting credit under these conditions?

Accepted Answer

The answer of Smith Corp.produces a product that generates repeat...

Question 17

The Five C's of Credit refer to the:

Accepted Answer

A) Credit reports issued by Dun & Bradstreet 
B) Interpretation of numerical credit scoring systems 
C) Attributes that help determine creditworthiness 
D) Financial ratios used to determine Altman's Z score

Question 18

A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.

Accepted Answer

A) True 
 B)False

Question 19

Candy Corporation sells a product for $25 with costs of $20 per unit.Candy uses a 12% rate of return for all its calculations.The CFO estimates that there is a 25% probability of a prospective new customers seeking credit will go bankrupt within the next 6 months.Customer wishes to place an order for 2,500 units of the product

Accepted Answer

A) Extend credit; total benefit of $5,300 
B) Extend credit; total benefit of $5,500 
C) Do not extend credit; total loss of $5,300 
D) Do not extend credit; total loss of $5,500

Question 20

Which of the following financial ratios is not used to develop Altman's Z score from multiple discriminate analysis?

Accepted Answer

A) Market value of equity/book debt 
B) EBIT/total assets 
C) Interest expense/total assets 
D) Working capital/total assets

Exam 22: Credit Management and Collection

Which of the following elements of credit terms might discourage purchasers from paying with a discount?

Which of the following financial ratios has the highest weight in Altman's Z score estimation?

The "five C's of credit" represent a framework for analyzing credit risk.

Extending trade credit can increase the probability of repeat orders.

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of: 5/15, net 60.By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Which of the following is not likely to be a characteristic of a numerical credit scoring system?

Which of the following typically justifies the offering of season dating?

Which of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

When sellers deliberately postdate an invoice by several months, their terms of sale include:

Consider a firm with the following financial ratios: EBIT/total assets = .12 Sales/total assets = 1.4 Market equity/book debt = .9 Retained earnings/total assets = .4 Working capital/total assets = .12 What is the firm Z scorer?

Progress payments allow the customers to choose the payment schedule.

Balsam Corporation is concerned about their current bad debt ratio of 9%.The CFO believes imposing a more stringent credit policy may reduce sales by 8% and reduce the bad debt ratio to 6%.If the cost of goods sold is 85% of the selling price, determine if the new policy should be undertaken.

Determine the annual effective rate of a customer that does not take advantage of credit terms of 2/10, n/30.

Which of the following changes to the terms of credit would make the effective annual rate increase?

The Five C's of Credit refer to the:

A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.

Which of the following financial ratios is not used to develop Altman's Z score from multiple discriminate analysis?