978-0133423822 Chapter 18 Part 4

Unlock access to all the studying documents.

View Full Document

19) Atlas Tire Irons, Inc. is considering borrowing $5,000 for a 3 month period. The irm

will repay the $5,000 principal amount plus $150 in interest. What is the annual

percentage rate (APR) rate of interest (use a 360-day year)?

A) 3%

B) 12%

C) 15%

D) 18%

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

20) Which of the following would NOT be considered an unsecured loan?

A) Accrued tax payments

B) Line of credit

C) Transaction loans

D) Factored accounts receivable

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: factoring

Principles: Principle 1: Money Has a Time Value

21) The primary advantage that factoring accounts receivable provides is

A) the lexibility it gives to the borrower.

B) that the inancial institution bears the risk of collection.

C) the low cost as compared with other sources of short-term inancing.

D) that the inancial institution services the accounts.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: factoring

Principles: Principle 1: Money Has a Time Value

22) The Omega Corp. plans to borrow $10,000 for a 2 months. At maturity, Omega will

repay the $10,000 principal plus $100 interest. What is the annual percentage rate (APR)

rate of interest on this loan?

A) 6%

B) 1%

C) 4%

D) 6.4%

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

23) The cost of trade credit varies with the

A) size of the cash discount.

B) length of time between the end of the discount period and the inal due date.

C) length of time between the end of the discount period and when the irm purchased from

the supplier.

D) both A and C.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

24) Which of the following is an advantage of trade credit?

A) Trade credit is conveniently obtained as a normal part of the irm’s operations.

B) No formal agreements are generally involved in extending credit.

C) The amount of credit extended expands and contracts with the needs of the irm.

D) All of the above.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

Use the following information to answer the following question(s).

Quick Corp. makes its purchases under terms of 2/10 net 30.

25) If Quick Corp. foregoes the discount and pays for its purchases according to the terms

of its trade credit, what is Quick’s efective cost of using this source of credit?

A) 26.67%

B) 31.48%

C) 36.73%

D) 51.32%

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

26) If Quick foregoes the discount but does not pay for its purchases until day 40, what is

Quick’s efective cost of using this source of credit? Assume that no penalty is incurred for

late payment.

A) 38.37%

B) 36.73%

C) 26.67%

D) 24.49%

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

27) When a commercial bank extends short-term credit to a irm, it can provide a line of

credit that involves

A) a legal obligation on the part of the bank to provide the stated credit.

B) no legal obligation on the part of the bank to provide the stated credit.

C) the requirement that the borrower maintain a compensating balance with the bank

throughout the loan period.

D) a ixed rate of interest.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: line of credit

Principles: Principle 1: Money Has a Time Value

Use the following information to answer the following question(s).

DEF, Inc. requires $540,000 in short-term credit and is currently arranging a loan with its

bank. ABC plans to use the funds for six months; the annual rate on the loan is 5%, and the

bank will require a 10% compensating balance.

28) If ABC must have loan proceeds of $540,000, then it must borrow

A) $540,000.

B) $600,000.

C) $486,000.

D) $660,000.

Question Status: New question

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: line of credit

Principles: Principle 1: Money Has a Time Value

29) What is the annual percentage cost of the loan, to the nearest .01%?

A) 5.00%

B) 4.50%

C) 5.56%

D) 2.5%

Question Status: New question

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

30) A irm will borrow $1 million for six months on a discount basis. The annual interest

rate on the loan is 6%. What is the annual percentage cost of the loan?

A) 5.64%

B) 6.38%

C) 3.19%

D) 6.00%

Question Status: Revised

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

31) Pledging accounts receivable as a source of short-term credit

A) is a type of loan secured by accounts receivable.

B) is a form of spontaneous credit.

C) involves the outright sale of accounts receivable to a inancial institution.

D) is an inexpensive but risky source of short-term inancing.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: secured current liabilities

Principles: Principle 1: Money Has a Time Value

32) The efective cost to the borrower of an unsecured bank loan is increased if a

compensating balance is required.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

33) Commercial paper is a source of credit available to large irms with healthy balance

sheets.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: commercial paper

Principles: Principle 1: Money Has a Time Value

34) A major risk in using commercial paper for short-term inancing is the inlexible

repayment schedule.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: commercial paper

Principles: Principle 1: Money Has a Time Value

35) Prior to establishing trade credit, the irm is required to make extended formal

agreements with the company.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

36) Lines of credit often require that the borrower maintain a minimum balance in the bank

throughout the loan period.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: line of credit

Principles: Principle 1: Money Has a Time Value

37) Compensating balances increase the APR because the irm must borrow more than it

would otherwise need.

Question Status: New question

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

38) Commercial paper is an unsecured form of credit.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: commercial paper

Principles: Principle 1: Money Has a Time Value

39) Lines of credit involve ixed rates of interest.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: line of credit

Principles: Principle 1: Money Has a Time Value

40) Secured loans are those that are secured by the lender’s faith in the ability of the

borrower to repay the funds when due.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: secured current liabilities

Principles: Principle 1: Money Has a Time Value

41) Accrued wages and taxes provide sources of inancing that rise and fall spontaneously

with the level of the irm’s sales.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: spontaneous sources of inancing

Principles: Principle 1: Money Has a Time Value

42) Commercial paper ofers the borrower the same lexibility that exists when bank credit

is used to meet inancing needs.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: commercial paper

Principles: Principle 1: Money Has a Time Value

43) Describe the diferences between secured and unsecured short-term credit.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: secured current liabilities

Principles: Principle 1: Money Has a Time Value

44) Discuss the advantages of using commercial paper.

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: commercial paper

Principles: Principle 1: Money Has a Time Value

45) Calculate the efective cost of the following trade credit terms if the discount is

foregone and payment is made on the net due date.

a. 2/15 net 30

b. 2/15 net 45

c. 2/15 net 60

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: trade credit

Principles: Principle 1: Money Has a Time Value

46) The U.R. Bloom Corporation established a line of credit with a local bank. The

maximum amount that can be borrowed under the terms of the agreement is $125,000 at a

rate of 5%. A compensating balance averaging 10% of the loan is required. If the irm

needs $100,000 for six months, what is the dollar cost of the loan and the annual

percentage rate (APR)?

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of a irm’s

use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

47) Maximus, Inc. is planning to borrow $2 million for 9 months at a discounted interest

rate of 4.5%. What is the annual percentage rate on the loan?

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of

a irm’s use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value

48) The Smith Corporation has purchased $500,000 worth of inventory. The vendor ofers

terms of 1/15 net 45. Unfortunately, Smith does not have enough cash available to take

advantage of the discount. It can borrow $500,000 from Wesson National Bank for 30 days

at an annual percentage rate of 6%. Should Smith forego the discount or pay within the

discount period with money borrowed from the bank?

Question Status: Previous edition

Objective: 18.4 Evaluate the cost of inancing as a key determinant of the management of

a irm’s use of current liabilities

Keywords: annual percentage rate

Principles: Principle 1: Money Has a Time Value