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 _____________.(b)
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)
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?(b)
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)
a. increased.
b. unchanged
c. decreased
6. Which of the following are factors that should be considered when choosing a bank?(d)
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.(c)
a. trade credit
b. compensating balance
c. promissory note
d. information line of credit
8. 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)
a. $342,098
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)
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?(c)
a. $10,000
b. $11,111
c. $13,456
d. $16,543
1. The correct answer is b. permanent assets; temporary assets. To understand this concept, we need to know that current assets are assets that can be converted into cash within a year. Permanent assets are the assets that a firm must carry even at the trough of sales, meaning they are necessary for the firm's operations regardless of sales fluctuations. On the other hand, temporary assets are those that fluctuate with seasonal or cyclical variations in sales, meaning they are only needed during specific periods of time. So, the correct answer is b. permanent assets; temporary assets.
2. The correct answer is b. False. Under normal conditions, a firm's expected ROE (Return on Equity) would probably be higher if it financed with long-term debt rather than with short-term debt. Long-term debt allows a firm to take advantage of lower interest rates and provides stability in financing. Using short-term debt may increase the firm's risk due to the potential variability in interest rates and the need for constant refinancing.
3. The correct answer is d. trade credit. Debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyer is known as trade credit. It represents the short-term financing that occurs when a company sells goods or services on credit terms to its customers.
4. The correct answer is d. all of the above are correct. There are several advantages of short-term financing compared to long-term financing. Short-term financing usually provides speed, as it can be obtained quickly. It also offers flexibility, as the terms and conditions are generally less restrictive compared to long-term financing. Additionally, short-term financing might have a lower cost because it is usually associated with lower interest rates compared to long-term financing.
5. The correct answer is a. increased. If the required compensating balance for a loan is larger than the transactions balance the firm would ordinarily hold, then the effective cost of the loan will be increased. This is because the firm must maintain a larger amount of funds in a non-interest-bearing account to fulfill the compensating balance requirement, which reduces the liquidity available for other purposes.
6. The correct answer is d. all of the above are correct. When choosing a bank, several factors should be considered. These factors include the bank's willingness to assume risks, as some banks may be more conservative in their lending practices. Loyalty to customers is also important, as good customer service can be crucial in maintaining a strong relationship with the bank. Additionally, the bank's specialization of loans can be advantageous if they have expertise in the specific industry or type of financing needed.
7. The correct answer is c. promissory note. A promissory note is an informal agreement between a bank and a borrower indicating the maximum credit the bank will extend to the borrower. It outlines the terms and conditions of the loan, including the repayment schedule, interest rate, and any collateral requirements.
8. The correct answer is b. $492,925. To calculate the firm's average accounts payable balance, we need to consider the credit terms provided (2/10, net 30 days). This means that the firm can take a 2% discount if payment is made within 10 days, and the full amount is due within 30 days. To estimate the average accounts payable balance, we use the formula (discount % / (1 - discount %)) * (365 / (days available for discount - days of net payment)). In this case, the average accounts payable balance is (0.02 / (1 - 0.02)) * (365 / (30 - 10)) * $300,000 = $492,925.
9. The correct answer is a. 10%. The effective interest rate can be calculated using the formula (1 + nominal rate / 1 - nominal rate) - 1. In this case, the nominal rate is 10% and the loan is a discount loan, meaning the interest is deducted upfront from the borrowed amount. Therefore, the effective interest rate is (1 + 0.10 / 1 - 0.10) - 1 = 10%.
10. The correct answer is c. $13,456. To determine the amount to borrow when using discount loan terms, we need to divide the desired loan amount by (1 - discount rate). In this case, the desired loan amount is $10,000. Since the discount rate is not provided, we cannot calculate the exact amount.