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Exam 18: Short-Term Finance and Planning

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Question 41

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Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral.This is an example of a(n) :

A) debenture.
B) line of credit.
C) banker's acceptance.
D) working loan.
E) inventory loan.

F) A) and B)
G) C) and E)

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Question 42

Multiple Choice

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Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0.

A) selling inventory at cost
B) collecting payment from a customer
C) paying a payment on a long-term debt
D) selling a fixed asset for book value
E) paying a supplier for the purchase of an inventory item

F) A) and E)
G) A) and D)

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Question 43

Multiple Choice

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Which of the following are sources of cash? I.decrease in inventory II.increase in accounts receivable III.repayment of a bond IV.sale of preferred stock

New York Bank provides Food Canning,Inc.a $250,000 line of credit with an interest rate of 1.75 percent per quarter.The credit line also requires that 1 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Food Canning,Inc.'s short-term investments are paying 1.2 percent per quarter.What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest.

Fancy Footwear has a line of credit with a local bank in the amount of $80,000.The loan agreement calls for interest of 7 percent with a compensating balance of 5 percent,which is based on the total amount borrowed.The compensating balance will be deposited into an interest-free account.What is the effective interest rate on the loan if the firm needs to borrow $75,000 for one year to cover operating expenses?

Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower.Why,then,would borrowers agree to such terms? What other types of alternative financing are available?

The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the:

Nadine's Boutique has a 30 day accounts payable period.The firm has expected quarterly sales of $1,100,$1,400,$1,600,and $2,100,respectively,for next year.The quarterly cost of goods sold is equal to 68 percent of the next quarter's sales.The firm has a beginning accounts payable balance of $550 as of Quarter 1.What is the amount of the projected cash disbursements for accounts payable for Quarter 3 of the next year? Assume a year has 360 days.

Costs that increase as a firm acquires additional current assets are called _____ costs.

Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a:

Which of the following are benefits derived from short-term financial planning? I.having advance notice of when your firm will require external financing II.being able to determine the extent of time for which a loan is required III.having the ability to time capital expenditures in order to place the least financial burden possible on a firm IV.knowing for certain what your cash balance will be six months in advance

Merryl Enterprises currently has an operating cycle of 59 days.The firm is analyzing some operational changes,which are expected to increase the accounts receivable period by 2 days and decrease the inventory period by 5 days.The accounts payable turnover rate is expected to increase from 42 to 46 times per year.If all of these changes are adopted,what will the firm's new operating cycle be?

On May 1,your firm had a beginning cash balance of $175.Your sales for April were $430 and your May sales were $480.During May,you had cash expenses of $110 and payments on your accounts payable of $290.Your accounts receivable period is 30 days.What is your firm's beginning cash balance on June 1?

New Town Bank offers you a $40,000 line of credit with an interest rate of 1.6 percent per quarter.The loan agreement also requires that 3 percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance.Short-term investments are currently paying 1.1 percent per quarter.What is the effective annual interest rate on the line of credit if you borrow the entire $40,000 for one year? Assume any funds borrowed or invested use compound interest.

Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days.

Which one of the following statements is correct?

The Bear Rug has sales of $811,000.The cost of goods sold is equal to 63 percent of sales.The beginning accounts receivable balance is $41,000 and the ending accounts receivable balance is $38,000.How long on average does it take the firm to collect its receivables?

Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future.How does this affect a firm's selection of a financing policy for its current assets?

A firm with a flexible short-term financial policy will:

Peterson's Antiquities currently has a 31 day cash cycle.Assume the firm changes its operations such that it decreases its receivables period by 2 days,decreases its inventory period by 3 days,and decreases its payables period by 4 days.What will the length of the cash cycle be after these changes?