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
11. Which of the following is not a type of short-term financing?(d)
a. Bank loans
b. Trade credit
c. Commercial paper
d. Bonds
1. The correct answer is (b) permanent assets; temporary assets.
2. The correct answer is (b) False.
3. The correct answer is (d) trade credit.
4. The correct answer is (d) all of the above are correct.
5. The correct answer is (a) increased.
6. The correct answer is (d) all of the above are correct.
7. The correct answer is (c) promissory note.
8. The correct answer is (b) $492,925.
9. The correct answer is (a) 10%.
10. The correct answer is (c) $13,456.
1. The correct answer is (b) permanent assets; temporary assets.
To understand this, we need to know the definitions of permanent assets and temporary assets.
Permanent assets are the current assets that a firm must carry even at the trough of sales. These assets are necessary for the day-to-day operations of the business and include items like cash, inventory, and accounts receivable.
Temporary assets, on the other hand, are current assets that fluctuate with seasonal or cyclical variations in sales. These assets are not necessary for the everyday operations of the business and include items like seasonal inventory or additional accounts receivable during peak sales periods.
2. The correct answer is (b) False.
Under normal conditions, a firm's expected ROE (Return on Equity) would likely be higher if it financed with long-term debt rather than short-term debt. Long-term debt provides stability and reduces the risk associated with relying on short-term financing options. Short-term debt may offer lower interest rates, but it also exposes the firm to higher risk due to potential interest rate fluctuations and the need for frequent 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 credit extended by suppliers to customers who purchase goods or services on credit terms. This form of debt is commonly used in business-to-business transactions.
4. The correct answer is (d) all of the above are correct.
Short-term financing offers several advantages over long-term financing, including speed (faster to obtain), flexibility (less restrictive terms), and generally lower costs. Short-term financing options can be accessed quickly to meet immediate funding requirements, provide more flexibility in managing the firm's financial needs, and often have 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 firm's ordinary transactions balance, it means that a portion of the loan amount must be kept as a non-interest-bearing balance with the lending institution. This increases the effective cost of the loan because the firm is forgoing potential interest earnings on the compensating balance. In essence, the firm is effectively paying more for the loan.
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, loyalty to customers, and specialization of loans. A bank that is willing to take on risks and has a customer-centric approach with specialized loan offerings can be beneficial for a business in terms of better financial services and support.
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 credit, repayment schedule, and any associated interest rates or fees. It is a legally binding document that establishes the borrowing limit for the borrower.
8. The correct answer is (b) $492,925.
To calculate the firm's average accounts payable balance, we need to use the formula:
Average Accounts Payable = (Discount / Discount %) * (1 - Discount %) / (1 - Discount % * Term %)
Given that the credit terms are 2/10, net 30, the discount is 2%, the term is 30 days, and the policy costs the firm $300,000 each year, we can substitute the values into the formula:
Average Accounts Payable = ($300,000 / 0.02) * (1 - 0.02) / (1 - 0.02 * (30 / 365))
Calculating this equation will give us the average accounts payable balance, which is approximately $492,925.
9. The correct answer is (a) 10%.
The effective interest rate of a discount loan can be calculated using the following formula:
Effective Interest Rate = (1 - Discount %) / (Discount %) * (1 / Discount Period)
In this case, the loan is provided at a 10% nominal rate on a one-year basis, which means there is no discount. Therefore, the effective interest rate will be equal to the nominal rate, which is 10%.
10. The correct answer is (c) $13,456.
To determine how much you would need to borrow to have the use of $10,000, we need to use the following formula:
Loan Amount = Amount / (1 - Discount %)
Given that the loan is a discount loan with a stated rate of 10%, we can substitute the values into the formula:
Loan Amount = $10,000 / (1 - 0.10)
Calculating this equation will give us the loan amount needed to have the use of $10,000, which is approximately $13,456.