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1. Most large payments between business entities are made electronically through either
CHIPS or Fedwire.
2. Fedwire charges a 0.05% fee on all transactions.
3. The potential benefits of additional credit analysis should always be weighed against the
incremental costs.
4. If the default probability is less than the profit margin, you should extend credit for the
sale.
5. Firms are more likely to grant credit the higher the probability that a potential customer
will become a repeat customer.
6. The more liberal the terms of the collection policy, the lower the potential for bad debts
and unprofitable sales.
7. A firm that buys on credit is in effect borrowing from its supplier.
8. Just-in-time inventory management is suitable for an aircraft manufacturer, like Boeing,
whose production schedules are known well in advance.
9. Commercial paper is usually used to finance overseas trade.
10. Extending trade credit can increase the probability of repeat orders.
11. The decision to offer credit depends on the probability of payment. You should grant credit
if the expected profit from doing so is greater than the profit from refusing.
12. Bond ratings are an expensive source of credit information on publicly traded companies.
13. An aging schedule is a statement sent to customers who are delinquent in their
payments.
14. Optimal inventory levels are lower when carrying costs are high, and are higher when the
cost of restocking inventories is high.
15. Since defaults can be costly, it is cost-effective to undertake a full credit analysis of all
customers.
16. When you deposit a check, there may be a delay before it gets credited to your bank
account. This reduces your available balance compared to your ledger balance.
17. Short-term securities have high interest-rate risk.
18. Lock-box systems allow local banks to collect and process the firm's remittances from
that area.
19. As the number of inventory orders per year increases, the total order costs decrease.
20. Firms should hold cash in a sufficient quantity so that the marginal value of liquidity
noticeably exceeds the value of interest forgone.
21. A common characteristic of money market instruments is their high degree of liquidity.
22. Repos are long-term unsecured loan agreements.
23. The cost of holding inventory is defined as the interest paid on the money used to buy that
inventory.
24. Bank certificates of deposit are the safest and most liquid of all the money market
securities.
25. In times of crisis, investors are most apt to prefer Treasury bills over any other money
market security.
26. Which of the following statements is false?
27. The economic order quantity:
28. Which of these firms will benefit the most from a lock-box service?
29. A firm that is located in New York receives on average 2,000 checks a day from its
customers in the Twin Cities area. Average payment per check is $1,500. A bank in the Twin
Cities is offering a lock-box arrangement for collection and processing of these checks at a cost
of $0.50 per check. This arrangement will reduce the float by 2 days. The daily interest rate for
the firm is 0.02%. What is the net saving from the lock-box arrangement?
30. Which one of the following terms of sale is the
most
restrictive?
31. At what point does a customer's unpaid account become delinquent when the terms of
sale are 2/10, net 60?
32. Which statement is true about terms of trade credit of 2/10, net 30?
33. What effective annual rate of interest is being charged to a customer who is granted
credit terms of 3/15, net 45 when the customer foregoes the discount and pays on the last date
prior to being delinquent?
34. An East Coast firm should establish a lock-box service on the West Coast if:
35. With terms of 4/15, net 60, what is the implied interest rate for forgoing a cash discount
and paying at the end of the credit period?
36. What happens to the implied interest rate on trade credit as the time interval between
the discount period and payment period is decreased?
37. When sales are made without the accompaniment of a formal debt contract, the sales are
said to be on:
38. Under the terms of a sight draft, the buyer's bank:
39. An accepted time draft is quite similar to:
40. Which one of the following statements is correct about banker's acceptances?
41. Which one of the following is
not
included in the five Cs of credit?
42. Credit scoring systems can be used to:
43. Higher Z scores from a multiple discriminate analysis indicate a:
44. The set of rules that determines whether or not credit should be extended is known as:
45. What credit decision is appropriate for a potential customer that offers an 80% chance of
paying on a $10,000 sale that has an 80% cost?
46. Ignoring the time value of money, how much does a firm lose on a $2,000 sale that has a
30% profit margin if the 20% probability of default occurs?
47. What is the break-even probability of collection for a firm that has a 40% profit margin?
