Question 1

A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10percent of the face value of the loan. The effective annual interest rate associated with this loan is

Accepted Answer

A)   8 percent.
B)   7.0 percent.
C)   8.9 percent.
D)   7.2 percent.E) B) and C)
F) None of the above

Question 2

Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrower's viewpoint.

Accepted Answer

A) True 
 B)False

Question 3

The interest rate charged on secured short-term loans is typically higher than the rate on unsecured short-term loans.

Accepted Answer

A) True 
 B)False

Question 4

A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The firmpaid for these goods on the 5th day after the date of sale. The firm must pay__________ for the goods.

Accepted Answer

A)   $1,100
B)   $900
C)   $1,000
D)   $990E) C) and D)
F) B) and D)

Question 5

The risk to a Canadian importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.

Accepted Answer

A) True 
 B)False

Question 6

The effective interest rate

Accepted Answer

A)   is lower if the loan is a discount loan.
B)   is higher on a loan if interest is paid at maturity.
C)   is not affected by whether the loan is a discount loan or a loan with interest paid at maturity.
D)   is higher if the loan is a discount loan.E) C) and D)
F) None of the above

Question 7

Commercial banks lend unsecured short-term funds in the following three basic ways

Accepted Answer

A)   single-payment note, revolving credit agreements, and commercial paper
B)   single-payment note, lines of credit, and commercial paper
C)   single-payment note, lines of credit, and revolving credit agreements
D)   commercial paper, lines of credit, and revolving credit agreementsE) A) and B)
F) B) and D)

Question 8

If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is increased.

Accepted Answer

A) True 
 B)False

Question 9

The two major sources of short-term financing are

Accepted Answer

A)   accounts payable and accruals.
B)   a line of credit and accruals.
C)   accounts receivable and notes payable.
D)   a line of credit and accounts payable.E) B) and D)
F) A) and B)

Question 10

Collateral is typically required for a

Accepted Answer

A)   single payment note.
B)   short-term self-liquidating loan.
C)   secured short-term loan.
D)   line of credit.E) A) and C)
F) A) and B)

Question 11

With a floating-rate note, the interest rate on the note changes

Accepted Answer

A)   when the prime rate changes.
B)   when the risk level of the borrower changes.
C)   when the demand for loans changes.
D)   when bank profits change.E) A) and B)
F) A) and C)

Question 12

Notes payable can be either spontaneous secured or spontaneous unsecured financing and result from the normal operations of the firm.

Accepted Answer

A) True 
 B)False

Question 13

A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.

Accepted Answer

A) True 
 B)False

Question 14

Unlike the spontaneous sources of unsecured short-term financing, bank loans are negotiated and result from deliberate actions taken by the financial manager.

Accepted Answer

A) True 
 B)False

Question 15

Lenders require collateral to

Accepted Answer

A)   extend to the borrower an unsecured loan.
B)   control the borrowing firm.
C)   reduce the risk of default.
D)   reduce the losses if the borrower defaults.E) A) and B)
F) None of the above

Question 16

Pledges of accounts receivable and factoring of accounts receivable are made on__________ basis, respectively.

Accepted Answer

A)   a nonnotification and a notification
B)   a notification and a nonrecourse
C)   a nonrecourse and a notification
D)   a notification and a recourseE) None of the above
F) All of the above

Question 17

A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requirescompensating balances of 10 percent of the face value of the loan. The effective annual interest rateassociated with this loan is

Accepted Answer

A)   15.4 percent.
B)   13.3 percent.
C)   12 percent.
D)   13.6 percent.E) B) and C)
F) All of the above

Question 18

A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for$1,900,000. The annual interest rate on the issue of commercial paper is

Accepted Answer

A)   5 percent.
B)   17 percent.
C)   10 percent.
D)   21 percent.E) A) and C)
F) A) and B)

Question 19

A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.

Accepted Answer

A) True 
 B)False

Question 20

Commercial banks and other institutions do not normally consider secured loans less risky than unsecured loans, and therefore require higher interest rates on them.

Accepted Answer

A) True 
 B)False

Exam 15: Management of Current Liabilities

Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrower's viewpoint.

Correct AnswerverifiedShow Answer

A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for$1,900,000. The annual interest rate on the issue of commercial paper is

Correct AnswerverifiedShow Answer

Commercial banks lend unsecured short-term funds in the following three basic ways

Correct AnswerverifiedShow Answer

A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requirescompensating balances of 10 percent of the face value of the loan. The effective annual interest rateassociated with this loan is

Correct AnswerverifiedShow Answer

Pledges of accounts receivable and factoring of accounts receivable are made on__________ basis, respectively.

Correct AnswerverifiedShow Answer

Commercial banks and other institutions do not normally consider secured loans less risky than unsecured loans, and therefore require higher interest rates on them.

Correct AnswerverifiedShow Answer

A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10percent of the face value of the loan. The effective annual interest rate associated with this loan is

Correct AnswerverifiedShow Answer

A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.

Correct AnswerverifiedShow Answer

The risk to a Canadian importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.

Correct AnswerverifiedShow Answer

With a floating-rate note, the interest rate on the note changes

Correct AnswerverifiedShow Answer

Collateral is typically required for a

Correct AnswerverifiedShow Answer

The interest rate charged on secured short-term loans is typically higher than the rate on unsecured short-term loans.

Correct AnswerverifiedShow Answer

The two major sources of short-term financing are

Correct AnswerverifiedShow Answer

Lenders require collateral to

Correct AnswerverifiedShow Answer

Notes payable can be either spontaneous secured or spontaneous unsecured financing and result from the normal operations of the firm.

Correct AnswerverifiedShow Answer

If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is increased.

Correct AnswerverifiedShow Answer

The effective interest rate

Correct AnswerverifiedShow Answer

A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.

Correct AnswerverifiedShow Answer

Unlike the spontaneous sources of unsecured short-term financing, bank loans are negotiated and result from deliberate actions taken by the financial manager.

Correct AnswerverifiedShow Answer

A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The firmpaid for these goods on the 5th day after the date of sale. The firm must pay__________ for the goods.

Correct AnswerverifiedShow Answer

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