1. Current assets that a firm must carry even at the trough of sales are _____________, while current that fluctuate with seasonal or cyclical variations in sales are _____________.
a. temporary assets; permanent assets
b. permanent assets; temporary assets
c. matched assets; non-matched assets
d. non-matched assets; matched assets
2. Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but the use of short-term debt would probably increase the firm’s risk.
a. True
b. False
3. Debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer is: D
a. accrued liabilities.
b. commercial paper.
c. bonds.
d. trade credit.
4. Which of the following are advantages of short-term (versus long-term) financing?
a. speed (faster to obtain)
b. flexibility (less restrictive)
c. generally a lower cost
d. all of the above are correct
5. If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is:
a. increased.
b. unchanged
c. decreased
6. Which of the following are factors that should be considered when choosing a bank?
a. willingness to assume risks
b. loyalty to customers
c. specialization of loans
d. all of the above are correct
e. none of the above
7. A(n) ______________ is an informal agreement between a bank and a borrower indicating the maximum credit the bank will extend to the borrower.
a. trade credit
b. compensating balance
c. promissory note
d. information line of credit
8. a. $342,098 Your firm buys on credit terms of 2/10, net 30 days, and it always pays on Day 30. If you calculate that this policy costs your firm $300,000 each year, what is the firm’s average accounts payable balance
b. $492,925
c. $721,934
d. $805,479
9. You plan to borrow $10,000 from your bank, which offers to lend you the money at a 10 percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if the loan is a discount loan?
a. 10%
b. 11.11%
c. 12.45%
d. 14.56%
10. Your bank offers to lend you money at a 10 percent nominal, or stated, rate on a one-year loan. The loan is a discount loan. How much would you have to borrow to have the use of $10,000?
a. $10,000
b. $11,111
c. $13,456
d. $16,543
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1. b. permanent assets; temporary assets
2. a. True
3. d. trade credit
4. d. all of the above are correct
5. a. increased
6. d. all of the above are correct
7. c. promissory note
8. a. $342,098
9. b. 11.11%
10. d. $16,543