Business Finance Exam 2 Chapters 6-9

Discounting refers to the growth process that turns $1 today into a greater value several periods in the future. False
Compounding refers to the growth process that turns $1 today into a greater value several periods in the future. True
The interest factor for the present value of a single sum is equal to (1 + i)/i. False
In determining the future value of an annuity, the final payment is not compounded at all. True
The amount of annual payments necessary to accumulate a desired total can be found by reference to the present value of an annuity table. False
If an individual’s cost of capital were 10%, he/she would prefer to receive $107 at the end of one year rather than $100 right now. False
In evaluating capital investment projects, current outlays must be judged against the current value of future benefits. TRUE True
Under what conditions must a distinction be made between money to be received today and money to be received in the future? A. A period of recession.B. When idle money can earn a positive return.C. When there is no risk of nonpayment in the future.D. When current interest rates are different from expected future rates. B
How much must you invest at 10% interest in order to see your investment grow to $5,000 in 5 years? A. $3,070B. $3,415C. $3,105D. None of these C
An annuity may be defined as A. a payment at a fixed interest rate.B. a series of payments of unequal amount.C. a series of yearly payments.D. a series of consecutive payments of equal amounts. D
If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account? A. Present value of $1B. Future value of $1C. Present value of an annuity of $1D. Future value of an annuity of $1 D
Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate. A. $19,033B. $27,870C. $32,389D. none of these A
Dr. J. wants to buy a Dell computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside? A. $697.00B. $627.93C. $823.15D. $531.81 B
Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed? A. Between 11% and 12%B. Between 8% and 9%C. 17%D. None of these A
Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today’s dollars? A. Present value of an annuityB. Present value of a single amountC. Future value of an annuityD. None of these A
Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use? A. the future value of $1B. the future value of an annuity of $1 and the future value of $1C. the present value of an annuity of $1 and the present value of $1D. none of these C
Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is: A. $61, 450B. $42,185C. $46,149D. $50,757 D
The shorter the length of time between a present value and its corresponding future value, A. the lower the present value, relative to the future value.B. the higher the present value, relative to the future value.C. the higher the interest rate used in the present-valuation. b
A dollar today is worth more than a dollar to be received in the future because A. risk of nonpayment in the future.B. the dollar can be invested today and earn interest.C. inflation will reduce purchasing power of a future dollar. B
Increasing the number of periods will increase all of the following except A. the present value of an annuity.B. the present value of $1.C. the future value of $1.D. the future value of an annuity. B
You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded semiannually. You will then withdraw the funds annually over the next 4 years. The annual interest rate is 8%. Your annual withdrawal will be: A. $2,340B. $4,332C. $797D. $1,085 D
John Doeber borrowed $125,000 to buy a house. His loan cost was 11% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment? A. $121,367B. $123,088C. $107,617D. None of these A
A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PVIF = .215Future value of $1 FVIF = 4.661Present value of annuity PVIFA = 9.818Future value of annuity FVIFA = 45.762 A. $1,584B. $7,384C. $15,555D. $15,588 B
A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be? Present value of $1 PVIF = .178Future value of $1 FVIF = 5.604Present value of annuity PVIFA = 9.129Future value of annuity FVIFA = 51.16 A. $1,435B. $13,070C. $8,043D. $13,102 C
Mr. Smith has just invested $20,000 for his son (age 7). The money will be used for his son’s education 10 years from now. He calculates that he will need $70,000 for his son’s education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal? A. between 12% and 13%B. between 13% and 14%C. between 14% and 15%D. between 15% and 16% B
Dan would like to save $2,000,000 by the time he retires in 40 years and believes he can earn an annual return of 8%. How much does he need to invest today to achieve his goal? A. $136,000B. $92,000C. $134,000D. $625,000 B
Ian would like to save $1,500,000 by the time he retires in 40 years. If he believes that he can achieve a 7% rate of return, how much does he need to deposit each year to achieve his goal? A. $9,692B. $37,500C. $5,790D. $7,514 D
Jeff believes he will need $60,000 annual income during retirement. If he can achieve a 5% return during retirement and believes he will live 30 years after retirement, how much does he need to save by the time he retires? A. $1,029,540B. $3,986,340C. $922,320D. $259,320 C
If Allison has saved $1,000,000 upon retirement, how much can she live on each year if she can earn 5% per year and will end with $0 when she expects to die 25 years after retirement? A. $295,334B. $20,953C. $371,885D. $70,952 D
Kathy has $60,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years? A. between 7% and 8%B. between 8% and 9%C. between 9% and 10%D. between 10% and 11% C
If Gerry makes a deposit of $1,500 at the end of each quarter for 5 years, how much will he have at the end of the 5 years assuming a 12% annual return and quarterly compounding? A. $40,305B. $30,000C. $108,078D. $161,220 A
Sara would like to evaluate the performance of her portfolio over the past 5 years. What compound annual rate of return has she achieved is she invested $12,000 5 years ago and now has $25,000? A. between 8% and 9%B. between 10% and 11%C. between 13% and 14%D. between 15% and 16% D
The faster a firm’s growth in sales, the more likely it is that an increasing percentage of financing will be internally generated. FALSE
Supply chain management has little impact on financial performance and is primarily a marketing and management concept. FALSE
Many companies such as McDonalds have embraced supply chain management using web-based procedures. TRUE
Working capital management is relatively unimportant for the small business. FALSE
The financial manager generally needs to devote little time to management of working capital. FALSE
Liquidating current assets are really fixed assets since they have lives greater than one year. FALSE
The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. TRUE
One of the big benefits of implementing supply chain management, is a reduction in inventory on hand. TRUE
Permanent current assets are not similar to fixed assets because they are fully liquidated within the year. FALSE
Wal-Mart requires manufacturers to ship goods with RFID tags so that it can better track inventory and reduce the need for supply chain management. FALSE
When using level production, inventory will peak in the month where unit sales trend above the production level. FALSE
Cash, accounts receivables, and inventory all move monthly in the same direction under level production. FALSE
Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods. TRUE
The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory. TRUE
The cash budget combines the cash receipts and cash payments schedules in determining cash flow. TRUE
As a general rule, it is desirable to finance the permanent assets, including “permanent current assets”, with long-term debt and equity. TRUE
Increased use of long-term financing is generally a more conservative approach to current asset financing. TRUE
A risky financial plan will use long-term financing for fixed assets, permanent current assets, and a portion of temporary current assets. FALSE
Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt. TRUE
Short-term interest rates are generally lower than long-term interest rates. TRUE
By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent. FALSE
Heavy use of long-term financing generally leads to lower financing costs. FALSE
During an economic “boom” period, a shortage of low-cost financing alternatives exists. TRUE
The “term structure of interest rates” refers to the relationship between yields on debt and their maturities. TRUE
The “term structure of interest rates” depicts the competitive cost of funds for the various short-term sources of funds such as Treasury bills, commercial paper, and bank CDs. FALSE
Yield curves change very little in the short run (3 months). FALSE
The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates. TRUE
It is not necessary to understand interest rate movements when deciding the structure of short-term debt relative to long-term debt. FALSE
The behavior of various kinds of financial institutions determines the shape of the yield curve, according to the market segmentation theory. TRUE
According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline. FALSE
Short-term interest rates have historically been more volatile than long-term rates. TRUE
The successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates. FALSE
Short-term interest rates are more dependent upon inflation than on current demand for money. FALSE
Interest rates and inflation are inversely related. FALSE
During tight money periods, short-term financing may be difficult to find. T
The expected value is the sum of the probabilities of all expected events. F
Expected value techniques allow consideration of more than one possible outcome. T
In periods of tight money, long-term rates are often higher than short-term rates. F
If we examine the ratio of working capital to sales, we can see that for the last several decades, firms’ liquidity has been increasing. F
Heavy use of long-term financing can generate more profit for the company during a tight money period. T
Use of long-term financing and the carrying of highly liquid assets is a high-risk combination. F
Firms with predictable cash-flow patterns should assume relatively low levels of risk. F
The more short-term financing relative to long-term financing, the more risky the financial structure. T
The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets. F
Expected value analysis requires taking the difference between the actual projected outcome and the historic outcome times its’ probability and summing these totals. F
Long-term financing is usually less expensive than short-term financing because it is not as advantageous to the corporation as short-term financing. F
The three most important factors when selecting a financing plan are risk, asset liquidity, and timing. T
Generally a downward sloping yield curve indicates an eminent economic boom. F
Pressure to increase current asset buildup often results from A. decline in sales growth.B. rapidly expanding sales.C. increased demands of short-term creditors.D. none of these B
A financial executive devotes the most time to A. Long-range planning.B. Capital budgeting.C. Short-term financing.D. Working capital management. D
The term “permanent current assets” implies A. the same thing as fixed assets.B. nonmarketable assets.C. some minimum level of current assets that are not self-liquidating.D. inventory. C
Well implemented web-based supply chain management has all of the following benefits except A. reduces inventory on hand.B. speeds up the ordering and delivery process.C. reduces the number of suppliers bidding for a company’s business.D. decreases overall costs. C
Permanent current assets are not a factor in a manager’s decision making process when all current assets will be A. financed by short-term debt.B. long-term in nature.C. self-liquidating.D. internally financed. C
RFID chips have been used to A. track livestock.B. track marathon runner’s time.C. track inventory at retailers.D. all of these. D
Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities? A. No external financing is required.B. $100,000C. $200,000D. $300,000 B
Tinbergen Cans expects sales next year to be $30,000,000. Inventory and accounts receivable (combined) will increase $4,000,000 to accommodate this sales level. The company has a profit margin of 10 percent and a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing A. No external financing will be needed.B. Less than $1,000,000 of external financing is needed.C. Between $1,000,000 and $2,000,000 of external financing is needed.D. More than $2,000,000 of external financing is needed. C
Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000? A. less than $5,000,000.B. between $5,000,000 and $10,000,000.C. greater than $10,000,000.D. there will be a shortage. A
One advantage of level production is that A. manpower and equipment are used efficiently at lower cost.B. current assets fluctuate more than with seasonal production.C. seasonal bulges and sharp declines in current assets occur.D. None of these are advantageous. A
Publishing companies are characterized by A. fluctuating production to match sales.B. seasonal sales.C. low inventories due to computer inventory management.D. a and b. B
If a firm uses level production with seasonal sales A. as sales decline inventory will increase.B. as sales decline inventory will decrease.C. as sales decline accounts receivables will increase.D. a and c are correct. A
Retail companies like Target and The Limited exhibit sales patterns that are mostly influenced by A. cyclical economic indicators.B. competitive prices.C. seasonality.D. sales promotions. C
Retail companies like Target and Limited Brands are more likely to have A. stable sales and earnings per share.B. cyclical sales but less volatile earnings per share.C. cyclical sales and more volatile earnings per share.D. cyclical sales but stable accounts receivable and inventory. C
The use of cash budgeting procedures A. helps the firm plan its current asset levels for a given production plan.B. makes managing inventory easier under seasonal production.C. illustrates fluctuating levels of current assets for a given production plan.D. all of these are correct. D
Assuming level production throughout the year, and assuming receivables are collected in two equal installments over the two months subsequent to the sales period, developing the cash budget requires the following steps: A. calculate beginning accounts receivable balanceB. calculate COGSC. estimate monthly net cash flow and bank borrowing or repaymentsD. calculate ending inventory C
When actual sales are greater than forecasted sales A. inventory will decline.B. production schedules might have to be revised upward.C. accounts receivable will rise.D. all of these. D
Normally, permanent current assets should be financed by A. long-term funds.B. short-term funds.C. borrowed funds.D. internally generated funds. A
Ideally, which of the following type of assets should be financed with long-term financing? A. Fixed assets onlyB. Fixed assets and temporary current assetsC. Fixed assets and permanent current assetsD. Temporary and permanent current assets C
A conservatively financed firm would A. use long-term financing for all fixed assets and short-term financing for all other assets.B. finance a portion of permanent assets and short-term assets with short-term debt.C. use equity to finance fixed assets, long-term debt to finance permanent assets, and short-term debt to finance fluctuating current assets.D. use long-term financing for permanent current assets and fixed assets and a portion of the short-term fluctuating assets and use short-term financing for all other short-term assets. D
Generally, more use is made of short-term financing because A. short-term interest rates are generally lower than long-term interest rates.B. most firms do not have easy access to the capital markets.C. short-term financing is usually more predictable than long-term financing.D. a and b above. D
The term structure of interest rates A. is an indication of investors’ expectations about inflation and future interest rates.B. will be downward sloping if short-term interest rates are higher than long-term rates.C. will be upward sloping under normal conditions.D. all of these D
The term structure of interest rates A. changes daily to reflect current competitive conditions in the money and capital markets.B. plots returns for securities of different risk.C. shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc.D. depicts interest rates for T-bills over the last year. A
The term structure of interest rates is influenced by A. inflation.B. money supply.C. Federal Reserve activities.D. all of these are true D
The term structure of interest rates or the yield curve A. is normal when short-term rates are higher than long-term rates.B. is inverted when short-term rates are lower than long-term rates.C. shows the yield to maturity for securities of equal risk over time.D. all of these are true. C
Financial managers can accurately predict future interest rates by A. calculating the anticipated inflation rateB. the Fed’s decision regarding the target federal funds rateC. measuring investor sentiment and consumer confidence indicesD. none of these D
The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the A. the expectations hypothesis.B. segmentation theory.C. the liquidity premium theory.D. market credit crunch theory. C
The term structure of interest rates A. is often referred to as the yield curve.B. depicts the relative level of short and long-term interest rates.C. is usually constructed with U.S. government securities of varying maturities.D. all of these. D
Yield curves change daily to reflect A. changing conditions in the money and capital markets.B. new inflation expectations.C. changing conditions in the overall economy.D. all of these. D
U.S. government securities are used to construct yield curves because A. they are free of default risk.B. the large number of maturities form a continuous curve.C. both a and b.D. none of these. C
As the economy moves through a business cycle, which of the following term structure of interest rate theories dominate the shape of the yield curve. A. The expectations theoryB. The market segmentation theoryC. The liquidity premium theoryD. None of these dominate the shape of the yield curve D
Some analysts believe that the term structure of interest rates is determined by the behavior of various types of financial institutions. This theory is called the A. expectations hypothesis.B. market segmentation theory.C. liquidity premium theory.D. theory of industry supply and demand for bonds. B
The theory of the term structure of interest rates which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the A. expectations hypothesis.B. segmentation theory.C. liquidity premium theory.D. market average rate theory. A
A “normal” term structure of interest rates would depict A. short-term rates higher than long-term rates.B. long-term rates higher than short-term rates.C. no general relationship between short- and long-term rates.D. medium rates (1-5 years) lower than both short-term and long-term rates. B
A firm will usually increase the ratio of short-term debt to long-term debt when A. short-term debt has a lower cost than long-term equity.B. the term structure is inverted and expected to shift down.C. the term structure is upward sloping and expected to shift up.D. the firm is undertaking a large capital budgeting project. B
Which of the following yield curves would be characteristic during a period of high economic growth? A. upward slopingB. downward slopingC. horizontalD. humped A
An inverted yield curve would suggest that A. interest rates are expected to rise.B. interest rates are expected to fall.C. inflation is expected to rise in the future.D. long-term rates are being pushed up by federal reserve policy. B
When the term structure of interest rates is downward sloping and interest rates are expected to decline, the A. financial manager generally borrows short-term.B. financial manager borrows at the lower long-term rates.C. corporation’s ratio of short-term to long-term debt is low.D. none of these. A
During tight money periods A. long-term rates are higher than short-term rates.B. short-term rates are higher than long-term rates.C. short-term rates are equal to long-term rates.D. the relationship between short and long-term rates remains unchanged. B
Which of the following techniques allows explicit consideration of more than one possible outcome? A. Operating leverageB. Present valueC. Least-squares regressionD. Expected value D
Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of returns? A. $28,800B. $4,000C. $4,800D. $35,200 C
Under normal conditions (70% probability), Plan A will produce $40,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the expected value of returns? A. $28,000B. ($30,000)C. $58,000D. ($2,000) D
Which of the following is a reason for diminishing liquidity in modern corporations? A. Just-in-time inventory programs.B. Better utilization of cash via computers.C. Increased use of point-of-sale terminals.D. All of these are reasons for diminishing liquidity. D
Kuznets Rental Center requires $1,000,000 in financing over the next two years. Kuznets can borrow long-term at 9 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 7 percent interest in the first year. Then, Kuznets projects paying 10 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true? A. Kuznets will definitely end up paying more under the long-term financing plan.B. Kuznets will definitely end up paying less under the long-term financing plan.C. Kuznets will probably pay more under the short-term financing plan.D. Kuznets will probably pay less under the short-term financing plan. D
Hicks Health Clubs, Inc., expects to generate an annual EBIT of $500,000 and needs to obtain financing for $1,000,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 8 percent, and with a long-term financing plan their rate will be 9 percent. What much more or less will their initial annual earnings after taxes be if they choose the most conservative financing plan? A. $10,000B. ($10,000)C. ($6,000)D. $6,000 C
Hicks Health Clubs, Inc., expects to generate an annual EBIT of $500,000 and needs to obtain financing for $1,000,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 8 percent, and with a long-term financing plan their rate will be 9 percent. What much more or less will their initial annual earnings after taxes be if they choose the most aggressive financing plan? A. $10,000B. ($10,000)C. ($6,000)D. $6,000 D
An aggressive, risk-oriented firm will likely A. borrow long-term and carry low levels of liquidity.B. borrow short-term and carry low levels of liquidity.C. borrow long-term and carry high levels of liquidity.D. borrow short-term and carry high levels of liquidity. B
Which of the following is not a condition under which a prudent manager would accept some risk in financing? A. Predictable cash-flow patternsB. Inventory is highly perishableC. Price of inventory is stableD. Easy access to capital markets B
Risk exposure due to heavy short-term borrowing can be compensated for by A. carrying highly liquid assets.B. carrying illiquid assets.C. carrying longer term, more profitable current assets.D. carrying more receivables to increase cash flow. A
Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings? A. Illiquid assets and heavy short-term borrowingB. Illiquid assets and heavy long-term borrowingC. Liquid assets and heavy long-term borrowingD. Liquid assets and heavy short-term borrowing C
Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings? A. Illiquid assets and heavy short-term borrowingB. Illiquid assets and heavy long-term borrowingC. Liquid assets and heavy long-term borrowingD. Liquid assets and heavy short-term borrowing A
An aggressive working capital policy would have which of following characteristics? A. A high ratio of long-term debt to fixed assets.B. A low ratio of short-term debt to fixed assets.C. A high ratio of short-term debt to long-term sources of funds.D. A short average collection period. C
The following are the expected 1 year T-bill rates for the next 4 years: 11%, 15%, 8%, and 10%. What would you expect the rate for 3 year securities would be? A. 14.7%B. 11%C. 8%D. 11.3% D
Riley Co. is considering a short-term or long-term financing plan for $6,000,000 in assets. They expect the following 1 year rates over the next 3 years: 7%, 9%, and 12%. Their long-term interest rate will be 9% for the 3 years. Assuming the rates follow their expectations, what will be the difference in interest costs over the 3 years? A. Long-term interest will be $60,000 more than short-term interestB. Long-term interest will be $60,000 less than short-term interestC. Long-term interest will be $1,140,00 less than short-term interestD. None of these B
Genetech has $2,000,000 in assets, have decided to finance 30% with long-term financing (13% rate) and 70% with short-term financing (9%) rate. What will be their annual interest costs? A. $78,000B. $126,000C. $440,000D. $204,000 D
When the yield curve is upward sloping, generally a financial manager should: A. utilize long-term financingB. utilize short-term financingC. wait for future financingD. lease A
When the yield curve is downward sloping, generally a financial manager should A. expect an economic boomB. utilize long-term financingC. increase investment and level of financing overallD. utilize short-term financing D
The largest source of short-term funds for most companies is suppliers (trade credit). T
Larger firms tend to be net users of trade credit. F
Small companies finance a relatively greater proportion of their assets through trade credit than do larger concerns. T
A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities. F
The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate. F
Accounts payable is a spontaneous source of funds which grows as the business expands. T
The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30. F
Stretching the payment period refers to the practice of trying to take a trade discount after the discount period. F
On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit. F
Firms can almost always increase the amount of time they take to pay for purchases without incurring problems. F
. Approximately 40% of short-term financing is in the form of accounts payable or trade credit. T
Trade credit is usually extended for periods of one year or more. F
A cash discount calls for a reduction in price if payment cannot be made within a specified time period. F
Leontief’s Wigs can borrow from its bank at 16 percent to take a cash discount. The terms of the cash discount are 2/10, net 60. Leontief’s should borrow from the bank to take the discount. F
Myrdal Boots can borrow from its bank at 12 percent to take a cash discount. The terms of the cash discount are 3/10, net 90. Myrdal Boots should borrow from the bank to take the discount. T
Bank deregulation has eased competition between commercial banks, savings and loans, brokerage houses, and new financial services companies. F
Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate. F
The lender’s primary concern is whether the borrower’s capacity to generate receivables is sufficient to liquidate the loan as it comes due. F
Although the LIBOR has remained competitive and comparable to the US Prime rate, it has remained slightly higher than the prime rate in the past 15 years. F
The London Interbank offered rate is used to set a base lending rate for some US domestic corporate loans. T
Although the prime rate is the rate that US banks charge their most credit-worthy customers, the prime rate is normally higher than the London Interbank Offer Rate (LIBOR). T
Compensating balances are important for banks because their existence allows them to make loans at lower quoted rates. T
A compensating balance will be lower in periods of tight money than in periods of credit ease. F
Compensating balances are a way for banks to recover the cost of corporate services provided, but not directly charged. T
Compensating balances represent unfair hidden costs of borrowing. F
Monthly installment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate. T
The annual percentage rate (APR) is a measure of the effective rate of interest on a loan on an annualized basis. T
The term “credit crunch” refers to a period in which the interest rate on credit is so high that firms cannot afford to borrow money. F
Commercial paper is an unsecured short-term IOU from a large financially secure company. T
It is easier for small firms to obtain financing through bank loans than through the commercial paper market. T
Small businesses frequently find commercial paper a useful means of obtaining funds when it is not possible to raise funds by other means. F
Commercial paper represents secured short-term borrowing by large companies. F
. Issuers of commercial paper can be divided into direct paper, dealer paper, and asset-backed commercial paper. T
One major advantage of commercial paper is that it can always be “rolled over”(reissued) when it matures. F
Firms using commercial paper are generally required to maintain commercial bank lines of credit equal to the amount of the paper outstanding. T
The commercial paper market is available to all New York Stock Exchange companies. F
One major disadvantage of commercial paper is that if the company’s credit quality declines, refinancing existing commercial paper might be impossible to achieve through a new issue of commercial paper. T
Finance paper usually carries a higher rate of interest than direct paper. F
One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank. F
Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the receivable to the buyer. T
Eurodollar loans are similar to U.S. bank loans in that they are usually short-term in nature. T
In times of tight credit in the United States, Eurodollar loans become difficult to obtain. F
It is difficult to acquire a loan in US dollars outside the United States. F
Even though a firm factors its receivables to a finance company, it is still liable if the account becomes uncollectible. F
The sale of securities backed by the receivables of large credit worthy firms is a large and growing source of financing. T
General Motors Acceptance Corp is one of the biggest issuers of asset-backed securities. T
The biggest category of asset backed securities is the home equity loan, followed by automobile receivables and credit card receivables. T
The sale of asset-backed securities can sometimes enable the issuing firm to acquire lower-cost funds than it normally would receive from a bank loan or bond offering. T
A trust receipt acknowledges that the lender trusts the borrower to repay the loan before any dividends are paid. F
The most common form of short-term financing is a bank loan. F
At historically low interest rate levels, compensating balances increase. T
A term loan is less risky to the bank thus they provide a fixed rate to the customer. F
The APR is generally lower than the stated rate by the bank. F
What is generally the largest source of short-term credit small firms? A. Bank loansB. Commercial paperC. Installment loansD. Trade credit D
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? A. Decreased receivables and increased bank loansB. Increased receivables and increased bank loansC. Increased payables and decreased bank loansD. Increased payables and increased bank loans C
The cost of not taking the discount on trade credit of 3/10, net 30 is equal to A. 44.54%B. 43.20%C. 55.67%D. none of these C
Large firms tend to be A. net users of trade credit.B. net suppliers of trade credit.C. firms with high levels of profitability.D. firms with low levels of inventory turnover and accounts receivable turnover. B
From the banker’s point of view, short-term bank credit is an excellent way of financing A. fixed assets.B. permanent working capital needs.C. repayment of long-term debt.D. seasonal bulges in inventory and receivables. D
The cost of not taking the discount on trade credit of 2/20, net 60 is equal to A. 18.36%B. 16.32%C. 18.00%D. 17.41% A
Bank loans to business firms A. are usually short-term in nature.B. are preferred by the banker to be self-liquidating.C. may require compensating balances.D. all of these. D
Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of $2,000. Its average daily sales are $3,000, and it collects accounts in 25 days. What is its net credit position? Note that a negative position implies receivables exceed payables. A. $15,000B. $1,000C. ($1,000)D. ($15,000) D
The problem facing the US financial system in the late 1980s and early 1990’s had which of the following characteristics? A. Collapse of real estate valuesB. International banking competitionC. Increased debt in highly leveraged companiesD. All of these D
The prime rate A. is the rate a bank charges its risky customers.B. has been quite volatile during the past two decades, moving as much as 8 percentage points in a 12-month period.C. is usually lower than treasury bill rates.D. none of these. B
The London Interbank Offered Rate (LIBOR) A. competes with the U.S. prime rate for those companies with an international presence.B. has been lower than the U.S. prime rate for at least the last decade.C. is the interbank lending rate for London banks.D. a and b are correct. D
LIBOR is A. a resource used in production.B. an interest rate paid on Eurodollar loans in the London market.C. an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks. B
Compensating balances A. are used by banks as a substitute for charging service fees.B. are created by having a sweep account.C. generate returns to customers from interest bearing accounts.D. are used to reward new accounts. A
General Rent-All’s officers arrange a $50,000 loan. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called A. an installment loan.B. a compensating balance.C. a discounted loan.D. a balloon payment. B
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? A. $920,000B. $1,058,264C. $941,177D. none of these C
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? A. 11.18%B. 17.27%C. 9.50%D. none of these A
A term loan is usually characterized by A. maturity of one to seven years.B. a variable interest rate.C. monthly or quarterly installment payments.D. all of these. D
Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest? A. 9.3%B. 7.0%C. 11.7%D. None of these B
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? A. Less than 12.5 percentB. More than 12.5 percent, but less than 13.5 percentC. More than 13.5 percent, but less than 14.5 percentD. More than 14.5 percent C
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? A. Less than 8.4 percentB. More than 8.4 percent but less than 8.6 percentC. More than 8.6 percent but less than 8.8 percentD. More than 8.8 percent B
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? A. 10.56%B. 21.12%C. 18.96%D. 22.00% B
The required compensating balance is usually computed as a A. percentage of customer loans outstanding.B. factor of accounts receivable.C. percentage of the bank’s commitments toward future loans.D. a and c are correct. D
Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest 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. A. 11.18%B. 19.00%C. 22.35%D. 8.08% A
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? A. Less than 11.4 percentB. More than 11.4 percent, but less than 11.6 percentC. More than 11.6 percent, but less than 11.8 percentD. More than 11.8 percent C
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? A. $16,000B. $80,000C. $100,000D. none of these C
Commercial paper is very popular with many firms because A. it can usually be issued below the prime rate.B. it satisfies the firm’s need for long-term funds.C. there are no required lines of credits at the bank.D. it is very easy to roll over (refinance) in times of economic turmoil. A
. The Truth in Lending law is designed to protect A. corporate borrowers.B. banks.C. consumers.D. investors in municipal bonds. C
Commercial paper has which of the following advantages to the issuer: A. It may be issued below the prime rate.B. It requires no compensating balances.C. It is secured by corporate assets to protect the buyer.D. a and b are both correct. D
Which of the following is not a characteristic of commercial paper? A. Issued by large firms.B. One-to-two year maturity.C. Rates are usually below prime rates on business loans.D. All the above are commercial paper characteristics. B
Commercial paper that is sold without the use of an actual paper certificate is known as A. finance paper.B. dealer paper.C. book-entry paper.D. term paper. C
Which of the following is not a true statement about commercial paper? A. Finance paper is sold directly to the lender by the finance company.B. Finance paper is also referred to as direct paper.C. Dealer paper is sold directly to the lender by a finance company.D. Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper. C
Multinational firms have found that they can lower borrowing costs A. by borrowing Eurodollars at a lower rate than the U.S. prime rate.B. by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime and then converting these foreign loans into dollars.C. by using more bankers’ acceptances.D. a and b are both correct. D
Accounts receivable may be used as a source of financing by A. pledging the receivables as loan collateral.B. factoring the receivables to a finance company.C. selling securities backed by the receivables.D. all of these. D
Which of the following best describes the benefits to the borrower of selling asset backed securities? A. Due to the portfolio effect, the borrower can package up low quality accounts receivable and sell them for a premium price.B. The borrower trades future cash flows for current cash flows.C. The asset-backed security is likely to carry a high credit rating of AA or better.D. b and c are correct. D
Which of the following is the largest category of asset-backed securities? A. Student LoansB. Automobile LoansC. Home Equity LoansD. Manufactured Housing Loans C
The extent to which inventory financing may be used depends on A. marketability of pledged goods.B. price stability of goods.C. perishability of goods.D. all of these. D
Which of the following is not a method for lenders to control pledged inventory? A. Blanket inventory liensB. Trust receiptsC. WarehousingD. Factoring D
Which method of controlling pledged inventory provides the greatest degree of security to the lender? A. Blanket inventory liensB. Overall inventory liensC. Trust receiptsD. Warehousing D
Which of the following is not a method for controlling pledged inventory? A. blanket inventory liensB. floor planningC. public warehousingD. each of the above is an inventory control method D
Hedging refers to A. avoiding high-risk investment opportunities.B. a transaction that reduces risk exposure.C. the same thing as asset diversification.D. avoiding the financial futures market. B
The financial futures market A. is a place in Chicago where future stocks are traded.B. allows for the delivery of financial instruments at a future point in time.C. is of particular value to small investors in managing their portfolios.D. two of the above. B
Firms exposed to the risk of interest rate changes may reduce that risk by A. obtaining a Eurodollar loan.B. hedging in the financial futures market.C. hedging in the commodities market.D. pledging or factoring accounts receivable. B
A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from A. declining interest rates.B. rising interest rates.C. inflation.D. changes in hedging activities. B
The effective rate on a loan with a 8.5% stated rate and 15% compensating balance is A. 11%B. 7.2%C. 8.5%D. none of these D
The effective rate on an $10,000 installment loan with bi-monthly payments, $1,600 in interest, for 2 years is: A. 16%B. 7.4%C. 29.5%D. 14.8% D
All of the following are evident during a credit crunch except: A. the Fed tightens money supplyB. higher business requirements for fundsC. decrease in interest ratesD. massive withdrawals of savings deposits C
All of the following are benefits of commercial paper to the corporation except: A. it is often issued at below the prime interest rateB. there are no compensating balance requirementsC. they are less riskyD. they provide prestige C
The reasons why a company may choose to pledge accounts receivable are all of the following except: A. lower interest rateB. borrowing capacity fluctuates with A/RC. provides another source of financing for companies with lower credit ratingsD. all of these are reasons for pledging accounts receivable A
In the management of cash and marketable securities, the primary concern is profitability. F
For modern corporations, the more cash they have, the better off they are. F
For most firms, the primary motive for holding cash is the transaction motive. T
Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis. F
A goal of cash management is to insure that the inflows and outflows of cash are synchronized. T
Sales, receivables, and inventory form the basis of cash flow. T
The cash generating process for a firm is continuous, even though cash flow can be sporadic. T
Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances. T
Float is the difference between the cash balance on the corporate books and the amount credited to the corporation by the bank. T
Float” is the name given for a short-term loan between suppliers and buyers. F
Checks can be cleared only through the Federal Reserve System. F
Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies. F
It is possible for companies to operate with negative cash balances on their books. T
A lock-box system is a method of extending disbursements. F
A lock-box is used by the selling corporation to speed up the check collection and check-clearing process. T
. “Extended disbursement float” has to do with the length of time a corporation takes to collect bills. F
Cost-benefit is not a consideration in development of a cash management system; only safety and liquidity. F
Electronic funds transfer will likely increase the use of float. F
The use of automated clearinghouses (ACHs) saves money for consumers, corporations and financial institutions by reducing transactions costs. T
The “SWIFT” transfer system was developed to aid regional bank fund transfers within the United States. F
SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network and thus eliminates any paper trail. T
Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes. T
Multinational firms find it difficult to shift funds from one country to another. F
In general, cash management at the international level employs the same techniques as domestic cash management. T
Eurodollars are U.S. dollars held on deposit by foreign banks. T
Stretching out the maturity of marketable securities can rarely result in a loss. F
The investment of excess short-term funds is usually diversified between short- and long-term marketable securities. F
Cash management becomes more important as the level of short-term interest rates rise. T
Treasury bills are unique in that they trade on a premium basis. F
Because they generally run a surplus budget, government agencies are able to issue securities with slightly lower yields than direct Treasury issues. F
Certificates of deposits purchased in small denominations of $1,000 at the savings and loan are readily marketable. F
Banker’s acceptances rank behind treasury bills and commercial paper as a vehicle for short-term investments. T
Small-denomination certificates of deposit are usually more liquid than large-denomination CDs. F
The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit. F
Bankers’ acceptances are short-term securities that arise from foreign trade. T
The 5 C’s of credit include character, capital, capacity, conditions, and collateral. T
One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future. T
. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000. T
Return on investment is the major decision criteria in credit decisions. T
Inventories are usually the most liquid, but lowest-yielding, current asset of a firm. F
The economic order quantity helps a firm determine the most efficient order size to place. T
The two basic costs associated with inventory are production cost and ordering cost. F
A reduction in carrying costs would increase the economic order quantity. T
Lower ordering costs would tend to increase a firm’s economic order quantity. F
If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be 1/2 the order size. T
Maintaining a safety stock will guard against an EOQ from occurring. F
Just-in-time inventory systems can leave manufacturers empty handed if suppliers can’t keep up with product growth rates. T
Just-in-time inventory management pushes the cost of holding inventory from the manufacturer to the manufacturer’s suppliers. T
The use of “float” has dramatically increased since the Check Clearing for the 21st Century Act was passed. F
When a potential customer has a mediocre credit history, a firm should not consider allowing them to become a customer. F
When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields. F
If a company would like to reduce their average collection period, they can either reduce offer a cash discount or increase their net terms. F
Level production allows a company to reduce inventory and maximize efficiency as compared to seasonal production. F
In managing cash and marketable securities, what should be the manager’s primary concern? A. Maximization of profitB. Maximization of liquid assetsC. Acceptable return on investmentD. Liquidity and safety D
Cash flow does not rely on which of the following? A. the payment patterns of customersB. the monetary policy of the Federal ReserveC. the speed at which suppliers and creditors process checksD. the efficiency of the banking system B
The difference between the amount of cash on the firm’s books and the amount credited to it by the bank is A. an overdraft.B. interest revenue.C. extended disbursement.D. float. D
“Float” takes place because A. a firm is early in paying its bills.B. the level of cash on the firm’s books is equal to the level of cash in the bank.C. a lag exists between writing a check and clearing it through the banking system.D. a customer writes “hot” checks. C
The system whereby funds are moved between computer terminals without use of checks is A. electronic funds transfer.B. float.C. a lock-box system.D. magnetic character recognition. A
How would electronic funds transfer affect the use of “float”? A. Increase its use somewhatB. Decrease its use somewhatC. Virtually eliminate its useD. Have no effect on its use C
One of the most popular uses of automated clearing houses is the A. direct deposit of checks.B. transfer of funds between U.S. banks and foreign banks.C. transfer of funds between government agencies.D. collection of accounts receivable from customers. A
One of the major cost savings for consumers using automated clearing houses is A. saving more than $1 billion in postage.B. saving time paying bills through check writing.C. security of having the payments and deposits directly deposited or deducted from your account.D. All of these are true. D
Which of the following is not a true statement about automated clearinghouses (ACHs)? A. Automated clearinghouses are responsible for the check clearing process between commercial banks and the Federal Reserve Banks.B. Commercial transactions using automated clearinghouses have been growing at close to 17% per year since 1989.C. Debits drawn on automated clearinghouses cost less than half that of checks processed through financial institutions.D. The ability to reduce transactions costs and create convenience is driving the growth of automated clearinghouses. C
Some of the services provided around the clock by SWIFT are A. international payments between banks.B. foreign exchange.C. trade finance transactions.D. all of these. D
International cash management is more complex than domestic based cash management because of A. difficult liquidity management.B. different banking systems.C. currency risk fluctuations.D. all of these. D
SWIFT’s implementation of the “smart card” is expected to A. decrease the likelihood of electronic fraud.B. remove the need for secret information to be sent through mail.C. guarantee the identity of the sender.D. all of these. A
International cash management systems are more complex than domestic cash management systems because A. many developing countries still use a cash payments system.B. some countries rely on electronic funds transfer more than the U.S.C. liquidity management, involving short-term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risks of currency fluctuations.D. none of these. C
The corporate sweep account is an account A. that allows companies to maintain zero balances in their checking accounts, with their excess cash moved into an interest earning account.B. that allows companies to write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest bearing account to the appropriate payment account.C. that allows companies to move their lock box collections into an interest bearing checking account.D. a and b are correct. D
A multinational company may prefer to hold sizeable cash balances in one currency rather than another because A. of high interest rates existing in one country.B. one country’s currency may be strong relative to the dollar.C. both a and bD. None of these C
The problem in stretching out the maturity of marketable securities is that A. you are legally locked in until the maturity date.B. longer term securities are often not available.C. there is greater possibility of loss.D. interest rates are generally lower. C
Probably the safest and most marketable instrument for short-term investment is A. commercial paper.B. large denomination certificates.C. Treasury notes.D. Treasury bills. D
Which of the following securities trades on a discount basis? A. Treasury notesB. Treasury billsC. Commercial paperD. Certificates of deposit B
A firm that wishes to minimize risk when investing idle cash would be least likely to buy A. commercial paper.B. long-term corporate bonds.C. negotiable certificates of deposit.D. Treasury bills of the U.S. government. B
Eurodollar certificate of deposits A. are not marketable investments.B. are used by banks to loan out funds to anyone seeking dollars.C. pay interest rates usually lower than the rates on U.S. treasury bills.D. are European currencies deposited into international U.S. branch banks. B
In comparison to securities issued by the U.S. Treasury, securities issued by U.S. government agencies like the Federal Land Bank A. are significantly riskier than Treasury securities.B. are much less liquid than Treasury securities.C. yield slightly more than Treasury securities.D. usually require the payment of higher commissions when purchased than Treasury securities. C
Treasury Inflation Protected Securities (TIPS) A. pay interest semiannually that equals a real rate of return specified by the U.S. Treasury, plus principal at maturity that is adjusted annually to reflect inflation’s impact on purchasing power.B. are a useful short-term investment if interest rates should rise quickly because of rapid increases in inflation.C. increase the coupon rate of the security to adjust for changes in inflation.D. a and b are true D
Which of the following securities represents an unsecured promissory note issued by a corporation? A. Certificates of depositB. Savings accountsC. Commercial paperD. Money market fund C
Eurodollars A. can only be redeemed at U.S. banks or their branches in European countries.B. are U.S. dollars which have been converted into several European currencies.C. may be borrowed by anyone who wishes to hold dollars.D. can only be redeemed at U.S. banks or their branches in any foreign country. C
Money market funds are A. accounts that allow small investors to participate in buying large-denomination securities.B. extremely risky but high-yielding accounts used by large corporations to finance operations.C. accounts that allow small investors to buy shares in companies that then buy shares of common stock.D. pools of bonds held by large utility companies. A
Characteristics of a money market mutual fund include A. the purchase of shares by investors, the proceeds of which are reinvested into liquid short-term securities.B. a required minimum balance of $2,500.C. the ability to be readily marketable.D. none of these. A
Characteristics of a money market deposit account include A. a lower risk than money market funds.B. insured by federal agencies.C. generally a limit of three deposits or withdrawals per month.D. all of these D
Which of the following are characteristics of money market investments? A. Money market funds are offered by banks.B. Money market funds are insured up to $100,000 by federal agencies.C. The minimum balance for money market deposit accounts is $5,000.D. None of these D
Money market funds A. are modeled after money market deposit accounts.B. are insured up to $100,000.C. have a minimum balance of $2,500.D. earn competitive market rates of return. D
The three primary policy variables to consider when extending credit include all of the following except A. credit standards.B. the level of inflation.C. the terms of trade.D. collection policy. B
The most subjective and also significant segment of the 5 C’s of credit for giving final approval is A. capacity.B. collateral.C. character.D. conditions. C
Dun & Bradstreet is known for providing A. interest rate information to cash managers.B. credit scoring reports that rank a company’s payment habits relative to its peer group.C. cash management systems to corporate treasurers.D. consumer credit reports to credit card companies. B
When developing a credit scoring report, many variables would be considered. Which of the following best represent the major factors Dun & Bradstreet would examine? A. The age of the management team, the dollar amount of sales, net profits, and long-term debt.B. The age of the company, the number of employees, the level of current assets.C. The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies).D. The company’s cash balances, return on equity, and its average tax rates. C
Which of the following is not a valid quantitative measure for accounts receivable collection policies? A. average collection periodB. aging of accounts receivablesC. ratio of debt to equityD. ratio of bad debts to credit sales C
Variables important to credit scoring models include A. age of company in years.B. negative public records.C. facility ownership.D. all of these. D
Inventory is usually divided into three basic categories except A. projected sales.B. work in progress.C. finished goods.D. raw materials. A
Companies that are mostly influenced by seasonal sales have to make a choice between A. level production and inventory buildup.B. seasonal production and an uneven workforce.C. a stable workforce and a fluctuating workforce.D. All of these. D
The costs of carrying inventory do not include A. the interest on funds tied up in inventory.B. the cost of warehouse space.C. ordering costs.D. insurance and handling costs. C
For a given firm, holding other factors constant, ordering costs per unit generally A. decline as average inventory increases.B. increase in proportion to increases in inventory.C. are considered fixed costs.D. are negotiated. A
The economic order quantity A. determines the reorder point.B. provides the lowest inventory costs.C. determines the safety stock.D. all of these. B
The economic order quantity A. assumes that inventory usage is seasonal.B. assumes that delivery times of each order are consistent.C. considers stock-outsD. all of these B
When using the economic order quantity model A. ordering costs increase as the level of inventory increases.B. carrying costs decrease as the level of inventory increases.C. costs are minimized when total carrying costs and total ordering costs are equal.D. none of these C
The amount of safety stock that a firm carries depends upon A. the predictability of inventory usage.B. the time period necessary to fill inventory orders.C. the riskiness of the storage facility.D. a and b are correct D
A Just-In-Time (JIT) inventory management program has all but which of the following requirements? A. quality productionB. large safety stocksC. close ties between suppliers, manufacturers, and customersD. minimizing inventory levels B
Cost savings from JIT inventory management include(s) A. reduced overhead expenses.B. lower inventory financing costs.C. greater productivity.D. all of these. D
All of the following are benefits of just-in-time inventory ordering systems except A. reduces warehouse space.B. saves utility and manpower costs.C. reduces inventory costs.D. prevents stock outs. D
Average daily remittances are $5 million, and “extended disbursement float” adds 3 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds. A. $500,000B. $1,500,000C. $1,000,000D. $0 B
Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A. $5,554.50B. $9,660.00C. $7,245.00D. none of these. A
Waldron Inc. is considering selling to a group of new customers that will bring in sales of $15,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 5 to 1 between sales and accounts receivable. What is the return on investment? A. 3%B. 25%C. 5%D. none of these B
Modos Company has deposited $2,000 in checks received from customers. It as written $1,400 in checks to its suppliers. The initial bank and book balance was $400. If $1,600 of its customer’s checks have been cleared but only $600 of its own, calculate its float. A. $200B. $400C. $300D. $700 B
Massa Machine Tool expects total sales of $10,000. The price per unit is $5. The firm estimates an ordering cost of $7.50 per order, with an inventory cost of $0.70 per unit. What is the optimum order size? A. 327 unitsB. 463 unitsC. 147 unitsD. 207 units D
Assuming that we can earn a 13.5% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal? A. a reduction in marketable securities which are earning a return of 14.2%.B. a decrease in inventories which are earning a 17.6% return.C. an increase in bank loans that would cost us 11.5%.D. an increase in accounts payable that would cost our firm 15%. C
If a company can implement cash management systems and save 3 days by reducing remittance time and 2 days by increasing disbursement time based on $3,000,000 in average remittances and $2,500,000 in average disbursements and their return on freed up funds is 12%, what is the max they should spend on the system? A. $2,000,000B. $1,650,000C. $1,250,000D. $1,000,000 B
All of the following are methods of controlling receivables except: A. offer a cash discountB. reduce net termsC. use DBISD. reduce cash sales D
Level production offers all of the following benefits except: A. lower overtime usageB. maximum efficiencyC. greater storage spaceD. higher use of capacity C
We expect that we can receive annual incremental income after taxes of $15,000 which includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R we should be willing to assume if our firm’s minimum required after-tax return is 12%? A. $18,000B. $125,000C. $168,000D. $180,000 B
All of the following are examples of carrying costs except: A. interest expenseB. warehouse spaceC. shipping costsD. insurance premiums C
The inventory decision model provides which type of information A. optimal total inventoryB. optimal safety stockC. optimal order sizeD. optimal carrying cost per unit C
Warren Enterprises expects 12,500 unit sales, has ordering costs of $9 per order, carrying costs of $.50 per unit and desires to keep 100 units in safety stock. Assuming level production, what is their average inventory? A. 200-300B. 301-400C. 401-500D. 501-600 C

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