Chapter 20 Which of the following best describes the agreement

compou

nded

quarterly, how much savings in interest did Ultimate realize by accessing the commercial paper market?

A) $4248

B) $6874

C) $7291

D) $12,480

87) 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) $8000

B) $9800

C) $10,200

D) $11,840

88) 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) $3645

B) $6800

C) $5696

D) $8000

89)

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

90)

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

91) 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.

92) 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 firm receives, thereby decreasing

the effective 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 firm sells the security directly to investors.

93) A firm issued three–month commercial paper with a $2,000,000 face value and received $1,964,000. The

effective annual rate that this firm is paying is closest to:

A) 8.0%

B) 7.5%

C) 1.8%

D) 7.3%

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

94) What is the average and maximum maturity of commercial paper?

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

95) The accounts receivable and inventory of a firm typically are used as collateral when issuing short–term

secured financing.

96) A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

97) Which of the following best describes the agreement where a firm sells receivables to a lender and the lender

agrees to pay the firm the amount due from its customers at the end of the firm‘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

98) Which of the following best describes the agreement where all of a firm’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) floating lien

99) Which of the following types of loan bears the highest interest rate?

A) trust receipt

B) floating lien

C) field warehouse arrangement

D) All these loans will bear approximately the same interest.

100) Inventory can be used as collateral for all the following EXCEPT:

A) a public warehousing arrangement

B) a private warehousing arrangement

C) a trust receipt

D) a factoring arrangement

101) Which of the following types of loan would be best for an investor who wishes to reduce risk by maintaining

the tightest control over inventory?

A) trust receipt

B) floating lien

C) field warehouse arrangement

D) public warehouse arrangement

102) Which of the following is a financing 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

103) 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%

104) General Manufacturing wants to borrow $1 million for three months. It uses its inventory as collateral for a

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%

105) Matt’s Machine Company has borrowed $10 million for four months at 5.5% APR, using inventory stored in

a field 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%

106) Matt’s Machine Company has borrowed $10 million for four months at 5.5% APR, using inventory stored in

a field 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%

107) ToysToysToys 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 ToysToysToys?

A) 4.1%

B) 15.4%

C) 45.8%

D) 62.6%

108) Inventory can be used as collateral for a loan in all of the following ways EXCEPT:

A) a floating lien.

B) a warehouse arrangement.

C) a factoring arrangement.

D) a trust receipt.

109) Which of the following statements is FALSE?

A) If a factoring arrangement is with recourse, the factor will pay the firm the amount due regardless of

whether the factor receives payment from the firm’s customers.

B) In a factoring of accounts receivable arrangement, the firm sells receivables to the lender (i.e., the

factor), and the lender agrees to pay the firm the amount due from its customers at the end of the firm’s

payment period.

C) Businesses can also obtain short–term financing by using secured loans, which are loans collateralized

with short–term assets—most typically the firm’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

firm and the dollar volume of its receivables.

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

110) A short–term financial plan tracks a firm’s cash balance and new and existing short–term financing, enabling

managers to forecast shortfalls and plan to fund them in the least costly manner.