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9) Carborundum Metals issues commercial paper with a face value of $1,000,000 and a
maturity of three months. Carborundum receives net proceeds of $992,000 when it sells
the paper. If the prime rate is 8% APR compounded quarterly, how much savings in interest
did Carborundum realize by accessing the commercial paper market?
A) $8,000
B) $9,800
C) $10,200
D) $11,840
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) Picketfence Realty issues commercial paper with a face value of $200,000 and a
maturity of six months. Picketfence receives net proceeds of $198,000 when it sells the
paper. If the prime rate is 7.7% APR compounded quarterly, how much savings in interest
did Picketfence realize by accessing the commercial paper market?
A) $3,645
B) $6,800
C) $5,696
D) $8,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) What is the term used for a short-term, unsecured debt sold by a large company to
investors?
A) commercial paper
B) retail paper
C) wholesale paper
D) unsecured paper
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
40
12) What is the term used for a short-term, unsecured debt sold by a large company to an
intermediary, who then resells the debt to investors in return for a fee for his or her
services?
A) commercial paper
B) direct paper
C) dealer paper
D) unsecured paper
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Which of the following statements is FALSE?
A) Unlike long-term debt, because of its short maturity, commercial paper is not rated by
credit rating agencies.
B) The interest on commercial paper is typically paid by selling it at an initial discount.
C) Commercial paper is short-term, unsecured debt used by large corporations that is
usually a cheaper source of funds than a short-term bank loan.
D) Extending the maturity of commercial paper beyond 270 days triggers a registration
requirement with the Securities and Exchange Commission (SEC), which increases issue
costs and creates a time delay in the sale of the issue.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14) Which of the following statements regarding commercial paper is FALSE?
A) With dealer paper, dealers sell the commercial paper to investors in exchange for a
spread (or fee) for their services.
B) With dealer paper, the spread increases the proceeds that the issuing irm receives,
thereby decreasing the efective cost of the paper.
C) The minimum face value is $25,000, and most commercial paper has a face value of at
least $100,000.
D) With direct paper, the irm sells the security directly to investors.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
41
15) A irm issued three-month commercial paper with a $2,000,000 face value and received
$1,964,000. The efective annual rate that this irm is paying is closest to ________.
A) 8.0%
B) 7.5%
C) 1.8%
D) 7.3%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
16) What is the average and maximum maturity of commercial paper?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
20.5 Short-Term Financing with Secured Financing
1) The accounts receivable and inventory of a irm typically are used as collateral when
issuing short-term secured inancing.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) A blanket lien exposes a lender to less risk and thus carries less interest than a trust
receipt.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
42
3) Which of the following best describes the agreement where a irm sells receivables to a
lender and the lender agrees to pay the irm the amount due from its customers at the end
of the irm's payment period, with the provision that the lender will receive payment from
the borrower if the customers default on their payments?
A) trust receipt
B) pledging of accounts receivable
C) factoring of accounts receivable with recourse
D) factoring of accounts receivable without recourse
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4) Which of the following best describes the agreement where all of a irm's inventory is
used to secure a loan?
A) pledging of accounts receivable
B) factoring of accounts receivable with recourse
C) factoring of accounts receivable without recourse
D) loating lien
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) Which of the following types of loan bears the highest interest rate?
A) trust receipt
B) loating lien
C) ield warehouse arrangement
D) All these loans will bear approximately the same interest.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
43
6) In which of the following secured loans can inventory NOT be used as collateral?
A) public warehousing arrangement
B) private warehousing arrangement
C) trust receipt
D) factoring arrangement
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) Which of the following types of loan would be best for a lender who wishes to reduce risk
by maintaining the tightest control over inventory?
A) trust receipt
B) loating lien
C) ield warehouse arrangement
D) public warehouse arrangement
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Which of the following is a inancing arrangement in which the lender's claim on the
borrower's assets in the event of a default is limited to only explicitly pledged collateral?
A) without recourse
B) with recourse
C) without factoring
D) with factoring
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
44
9) Tropic Fruit Preserves wants to borrow $4 million for two months. It uses its inventory
as collateral for a 15% (APR) loan under a warehouse arrangement where the warehouse
fee is $18,000 paid at the end of the two months. What is the EAR of this loan for Tropic
Fruit Preserves?
A) 3.2%
B) 7.8%
C) 15.5%
D) 19.2%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) General Manufacturing wants to borrow $1 million for three months. It uses its
inventory as collateral for an 11% (APR) loan under a warehouse arrangement where the
warehouse fee is $12,000 paid at the start of the three months. What is the EAR of this loan
for General Manufacturing?
A) 2.8%
B) 4.0%
C) 17.1%
D) 24.4%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
45
11) Matt's Machine Company has borrowed $10 million for four months at 5.5% APR, using
inventory stored in a ield warehouse as collateral. The warehouse fee is 0.5%, payable at
the beginning of the loan. What is Matt's EAR?
A) 5.5%
B) 7.24%
C) 0.58%
D) 7.01%
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
12) Matt's Machine Company has borrowed $10 million for four months at 5.5% APR, using
inventory stored in a ield warehouse as collateral. The warehouse fee is 0.5%, payable at
the end of the loan. What is Matt's EAR?
A) 5.5%
B) 7.20%
C) 0.58%
D) 7.01%
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
46
13) ToysToys Corporation wants to borrow $500,000 for one month. It uses its inventory as
collateral for a 16% (APR) loan, under a warehouse arrangement where the warehouse fee
is $14,000, paid at the end of the month. What is the EAR of this loan for ToysToys?
A) 4.1%
B) 15.4%
C) 45.8%
D) 62.6%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) In which of the following loans can inventory NOT be used as collateral?
A) a loating lien
B) a warehouse arrangement
C) a factoring arrangement
D) a trust receipt
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) Which of the following statements is FALSE?
A) If a factoring arrangement is with recourse, the factor will pay the irm the amount due
regardless of whether the factor receives payment from the irm's customers.
B) In a factoring of accounts receivable arrangement, the irm sells receivables to the
lender (i.e., the factor), and the lender agrees to pay the irm the amount due from its
customers at the end of the irm's payment period.
C) Businesses can also obtain short-term inancing by using secured loans, which are loans
collateralized with short-term assets—most typically the irm's accounts receivables or
inventory.
D) Both the interest rate and the factor's fee vary depending on such issues as the size of
the borrowing irm and the dollar volume of its receivables.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20.6 Putting It All Together: Creating a Short-Term Financial Plan
1) A short-term inancial plan tracks a irm's cash balance and new and existing short-term
inancing, enabling managers to forecast shortfalls and plan to fund them in the least costly
manner.
47
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
48
