978-0133423822 Chapter 18 Part 5

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49) Lightbulbs.com sells industrial and institutional lighting supplies through its website. It

sells directly to businesses and organizations such as universities and hospitals on terms of

net 90. To inance its rather large investments in receivables and inventory, the irm has an

average need for $2,000,000 in short-term loans. It is choosing between 3 alternative

arrangements:

Converse Bank ofers a 4.75% APR with interest and principal paid at the end of the year.

Guaranty Bank ofers a rate of 4.5% with interest discounted at the time of the loan.

County Bank ofers 4.25% with a 10% compensating balance.

Which bank ofers the APR when all terms of the loan are considered? You may assume that

required amounts are borrowed for the full year.

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

50) The annual percentage rate (APR) on short-term loans from Bank A is 5.75% per year.

Bank B claims that their interest rate is only 5.44% per year. However, Bank B charges

interest on a discount basis. Which bank is charging the lowest APR on a one-year 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

18.5 Managing the Firm’s Investment in Current Assets

1) Which of the following is NOT a typical characteristic of money-market securities?

A) Little or no default risk

B) Liquid, easily bought and sold

C) Interest is not taxable at federal level

D) Maturities less than 1 year

Question Status: Revised

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

2) A disadvantage involved in investing in marketable securities is that

A) this reduces the risk of illiquidity.

B) this investment increases net working capital.

C) this investment ofers a lexible means of inancing.

D) these assets ofer low rates of return, commensurate with their risk.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

3) “Float” is the term given to

A) diferences between the cash balance and the balance of cash plus marketable

securities.

B) diferences between the cash balance in the ledger and the funds available in the irm’s

checking account.

C) the period between the date an invoice is received and the date on which it must be

paid.

D) the practice of deliberately delaying payments beyond the due date.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

4) Typical securities in which irms invest their temporary cash surpluses include all of the

following EXCEPT

A) U. S. Treasury Bills.

B) commercial paper.

C) high quality corporate bonds.

D) Money Market Mutual Funds.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

5) Which of the following would NOT typically be used for assessing customer quality for

purposes of granting trade credit?

A) Ratio analysis

B) Aging of accounts receivable

C) Credit scoring

D) Credit rating services

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof

6) Accounts receivable typically comprise ________ of a irm’s assets.

A) 25%

B) 50%

C) less than 1%

D) 10%

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof

7) Which of the following terms would tend to minimize a irm’s investment in accounts

receivable?

A) Net 15

B) Net 30

C) 1/15 net 45

D) 2/10 net 30

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof

8) Which of the following money market instruments may not be subject to state and local

taxes?

A) Bankers’ acceptances.

B) Repurchase agreements

C) U. S. Treasury bills

D) Federal agency securities

Question Status: New question

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof

9) Which of the following factors inluence the size of the irm’s investments in accounts

receivable?

A) Terms of sale

B) Required minimum balance

C) Customer quality

D) A and C

Question Status: New question

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof

10) Which of the following factors does not have a major inluence on credit ratings?

A) Amount owed as a percent of credit limit

B) Zip code

C) Length of credit history

D) Applications for new credit

Question Status: New question

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof

11) Management of a irm’s liquidity involves management of the irm’s investment in

current assets.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: liquidity

Principles: Principle 2: There Is a Risk-Return Tradeof

12) When faced with a surplus of cash, most irms should stretch their trade accounts.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

13) T-bills and Treasury bonds are guaranteed by the full faith and credit of the United

States and are therefore default-free.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

14) A banker’s acceptance is a draft drawn on a speciic bank by an exporter in order to

obtain payment for goods that he has shipped to a customer who maintains an account with

that speciic bank.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

15) A negotiable certiicate of deposit (CD) is a marketable receipt for funds deposited in a

bank.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

16) Although CDs are slightly more risky than Treasury bills, the yield is usually slightly

less.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

17) If revenues can be forecast to fall within a tight range of outcomes, then the ratio of

cash and near-cash to total assets will be greater for the irm than if the prospective cash

inlows might be expected to vary over a wide range.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

18) Electronic funds transfer (EFT) could eventually eliminate the use of most checks and

minimize loat.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

19) Treasury bills are a safer choice than bank deposits for very large sums.

Question Status: New question

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

20) One of the attractive features of commercial paper is an active secondary market.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

21) Marketable securities are near-cash assets because they can be converted into cash

quickly.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

22) Investing in additional marketable securities and inventories creates higher

proitability and lower liquidity.

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: cash and marketable securities

Principles: Principle 2: There Is a Risk-Return Tradeof

23) Firms should hold the minimum amounts of inventories that will not jeopardize

productions schedules or the satisfaction of customer expectations.

Question Status: New question

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: inventories

Principles: Principle 2: There Is a Risk-Return Tradeof

24) Briely describe at least three useful tools for maintaining control over accounts

receivable.

should pursue stricter or more liberal credit policies.

Dif: 2

Question Status: Previous edition

Objective: 18.5 Understand the factors underlying a irm’s investment in cash and marketable

securities, accounts receivable, and inventory.

Keywords: accounts receivable

Principles: Principle 2: There Is a Risk-Return Tradeof