Foundations of Financial Mgmt: Ch 8-2

What is generally the largest source of short-term credit small firms? Trade credit
Trade credit may be used to finance a major part of the firm’s working capital when the firm extends less liberal credit terms than the supplier.
A large manufacturing firm has been selling on a 3/10 net 30 basis. The firm changes its credit terms to 2/20 net 90. What change might be expected on the balance sheets of its customers?,Increased payables and decreased bank loans
The cost of not taking the discount on trade credit of 3/10 net 30 is equal to 55.67%
Large firms tend to be net suppliers of trade credit.
From the banker’s point of view short-term bank credit is an excellent way of financing seasonal bulges in inventory and receivables.
The cost of not taking the discount on trade credit of 2/20 net 60 is equal to 18.36%
Bank loans to business firms are usually short-term in nature. are preferred by the banker to be self-liquidating. may require compensating balances.
Commercial bank term loans are offered to superior credit applicants.
Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of $2.000. Its average daily sales are $3000 and it collects accounts in 25 days. What is its net credit position? Note that a negative position implies receivables exceed payables.,($15.000)
The problem facing the US financial system in the late 1980s and early 1990’s had which of the following characteristics? Collapse of real estate values. International banking competition. Increased debt in highly leveraged companies
The prime rate has been quite volatile during the past two decades moving as much as 8 percentage points in a 12-month period.
The London Interbank Offered Rate (LIBOR) competes with the U.S. prime rate for those companies with an international presence. has been lower than the U.S. prime rate for at least the last decade.
LIBOR is an interest rate paid on Eurodollar loans in the London market.
Compensating balances are used by banks as a substitute for charging service fees.
General Rent-All’s officers arrange a $50.000 loan. The company is required to maintain aminimum checking account balance of 10% of the outstanding loan. This practice is called a compensating balance.
Analog Computers needs to borrow $800.000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $800 000 spendable cash?,$941,177
If Analog computers can borrow at 9.5% for 3 years what is the effective rate of interest on a $800.000 loan where a 15% compensating balance is required? 11.18%
A term loan is usually characterized by maturity of one to seven years. a variable interest rate. monthly or quarterly installment payments.
In determining the cost of bank financing which is the important factor?,Effective rate
Mr. Jones borrows $2.000 for 90 days and pays $35 interest. What is his effective rate of interest? 7.0%
Von Hayek’s Kayaks can borrow $10.000 for 60 days at a cost of $200 interest. What is the effective rate of interest? More than 11.5 percent
Kenneth’s Arrows and Bows borrow $10.000 for one year at 12 percent interest. What is the effective rate of interest if the loan is discounted? More than 13.5 percent but less than 14.5 percent
East Coast Cleaners borrows $10.000 for 90 days and pays $210 interest. What is the effective rate of interest if the loan is discounted? More than 8.4 percent but less than 8.6 percent
Ms. Smith borrowed $1.250 at an 11% stated rate of interest and was to pay back the loan in 24 monthly payments. What is her effective rate of interest? 21.12%
The required compensating balance is usually computed as a percentage of customer loans outstanding. percentage of the bank’s commitments toward future loans.
Holland Construction Co. has an outstanding 180-day bank loan of $400.000 at an annualinterest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount. 11.18%
Koopman’s Chickens Inc. plans to borrow $300.000 from its bank for one year. The rate of interest is 10 percent but a compensating balance of 15 percent is required. What is the effective rate of interest? More than 11.6 percent but less than 11.8 percent
Friedman Roses Inc. needs $80.000 in funds for expansion. With a compensating balance requirement of 20% how much will the firm need to borrow?, $100.000
Commercial paper is very popular with many firms because it can usually be issued below the prime rate.
The Truth in Lending law is designed to protect consumers.
Commercial paper has which of the following advantages to the issuer: It may be issued below the prime rate. It requires no compensating balances.
Which of the following is not a characteristic of commercial paper? One-to-two year maturity.
Commercial paper that is sold without going through a broker or dealer is known as direct paper.
Commercial paper that is sold without the use of an actual paper certificate is known as book-entry paper.
Which of the following is not a true statement about commercial paper? Dealer paper is sold directly to the lender by a finance company.
Multinational firms have found that they can lower borrowing costs by borrowing Eurodollars at a lower rate than the U.S. prime rate. by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime and then converting these foreign loans into dollars.
Accounts receivable may be used as a source of financing by pledging the receivables as loan collateral. factoring the receivables to a finance company. selling securities backed by the receivables.
Which of the following best describes the benefits to the borrower of selling asset backed securities? The borrower trades future cash flows for current cash flows. The asset-backed security is likely to carry a high credit rating of AA or better.
Which of the following is the largest category of asset-backed securities? Home Equity Loans
The extent to which inventory financing may be used depends on marketability of pledged goods. price stability of goods. perishability of goods.
Which of the following is not a method for lenders to control pledged inventory? Factoring
Which method of controlling pledged inventory provides the greatest degree of security to the lender? Warehousing
Which of the following is not a method for controlling pledged inventory? each of the above is an inventory control method
Hedging refers to a transaction that reduces risk exposure.
The financial futures market allows for the delivery of financial instruments at a future point in time.
Firms exposed to the risk of interest rate changes may reduce that risk by hedging in the financial futures market.
A firm has invested in corporate bonds it may engage in a financial futures contract in order to protect itself fromrising interest rates.
The effective rate on an $10.000 installment loan with bi-monthly payments $1.600 in interest for 2 years is:,14.8%
All of the following are evident during a credit crunch: the Fed tightens money supply. higher business requirements for funds. massive withdrawals of savings depositsAll of the following are benefits of commercial paper to the corporation:,it is often issued at below the prime interest rate. there are no compensating balance requirements. they provide prestige
The reasons why a company may choose to pledge accounts receivable are all of the following: borrowing capacity fluctuates with A/R. provides another source of financing for companies with lower credit ratings

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