Question 1

Under the terms of a sight draft, the buyer's bank:

Accepted Answer

A) Is instructed to make immediate payment 
B) Treats the invoice like a postdated cheques 
C) Forwards the acceptance to the seller until due 
D) Treats the purchase as a conditional sale

Question 2

A retailer buys Christmas merchandize from the manufacturer on Sep.1.The manufacturer postdates the invoice to Dec.31, and the credit terms of the sale are 2/10, net 30.When is the payment due?

Accepted Answer

A) Jan.10 
B) Jan.30 
C) Feb.10 
D) Sep.30

Question 3

The break-even probability of collection is positively related to the firm's percentage of profit margin.

Accepted Answer

A) True 
 B)False

Question 4

What information can the financial manager obtain from an aging schedule of accounts receivable?

Accepted Answer

The answer of What information can the financial manager obtain...

Question 5

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 6

According to credit experts, a full credit analysis should be conducted:

Accepted Answer

A) On each customer of a firm 
B) Only when payment is doubtful 
C) Only on customers that are delinquent 
D) On all repeat customers

Question 7

A firm is considering a one-time sale of $100,000 to a customer.The cost of goods sold for this sale is $90,000.If the probability of the customer paying is 0.8, what is the expected profit from this transaction?

Accepted Answer

A) Zero 
B) -$10,000 
C) +$8,000 
D) +$10,000 Expected profit = 0.8(100,000 - 90,000) - (1.08)(90,000)

Question 8

A firm that makes only cash sales has the luxury of no uncollectible receivables at the expense of forgone sales.Does it make financial sense to allow credit sales if doing so would increase sales from 1,000 units monthly to 1,150, at a sales price of $50, and a present value of costs of $39 per unit.Assume that all sales will now be made on credit and that 6% of sales will end up being uncollectible after the 30-day payment period.The opportunity cost of capital is 1% per month.

Accepted Answer

The answer of A firm that makes only cash sales...

Question 9

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 10

What is the break-even probability of collection when the present value of revenues from a sale is $100,000 and the present value of cost is $87,000?

Accepted Answer

A) 1.00 
B) 0.87 
C) 0.74 
D) 0.13

Question 11

Assuming that a credit decision has been analyzed and credit refused due to a negative expected profit, which of the following changes, if of sufficient magnitude, might change the decision to one of approval?

Accepted Answer

A) Increase the percentage of profit margin 
B) Decrease the probability of payment 
C) Increase the discount rate 
D) Reduce the expected profit

Question 12

You are buying goods worth $75,000 from a firm that offers the credit terms of 2/10, net 30.What will be the actual payment if you paid within 10 days?

Accepted Answer

A) $73,500 
B) $74,250 
C) $75,000 
D) $76,500 Cash discount = 75,000 x .02 = $1,500

Question 13

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?

Accepted Answer

A) Grant credit since expected profit is $3,200 
B) Grant credit since expected profit is $800 
C) Refuse credit since expected profit is zero 
D) Refuse credit since expected loss is $3,000 Expected profit from offering credit:
= p x PV(Rev - cost) - (1 - p) x PV(cost)
= )8 x PV($10,000 - 8,000) - .2 x PV(8,000)
= PV1,600 - PV1,600

Question 14

The set of rules that determines whether or not to extend credit is known as:

Accepted Answer

A) Credit analysis 
B) Credit policy 
C) Multiple discriminate analysis 
D) The terms of trade credit

Question 15

Which of the following is the least expensive source of credit information?

Accepted Answer

A) Dun & Bradstreet 
B) Moody's 
C) Standard & Poor's 
D) Bond ratings

Question 16

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

Accepted Answer

A) 20% 
B) 25% 
C) 50% 
D) 75% break-even probability of collection = .25% - .75(1 - x%)
= )25% - .75 + .75x% = 0

Question 17

In general, a firm's credit policy should grant the credit whenever the expected:

Accepted Answer

A) Loss from default is less than the cost of the product 
B) Profit from granting credit exceeds zero 
C) Profit exceeds the price of the product 
D) Probability of a loss is less than 50%

Question 18

Which of the following credit agreements provides the least protection to the seller?

Accepted Answer

A) Banker's acceptance 
B) Conditional sale 
C) Open account 
D) Commercial draft

Question 19

Saxon Corporation sells a product for $48 with costs of $33 per unit.Saxon uses a 9% rate of return for all its calculations.The CFO estimates that there is a 20% probability of a prospective new customers seeking credit will go bankrupt within the next 6 months.Customer wishes to place an order for 1,000 units of the product.

Accepted Answer

A) Extend credit; total benefit of $3,780 
B) Extend credit; total benefit of $3,880 
C) Extend credit; total benefit of $3,980 
D) Extend credit; total benefit of $4,080

Question 20

Profits are maximized in a firm when the number of bad accounts is minimized.

Accepted Answer