Chapter 15 FIN
A firm has directly placed an issue of commercial paper that has a maturity of 60 days. The issue sold for $980,000 and has an annual interest rate of 12.24 percent. The value of the commercial paper at maturity is ________ (assume 360 days in a year).
$1,000,000
The stated cost of a pledge of accounts receivable is normally ________ above the prime rate.
1 to 4 percent, some says 2-5
A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is ________.
15.4%
A single-payment note generally has a maturity of ________.
30 days to 9 months or more
The cost of giving up a cash discount under the terms of sale 1/10 net 60 (assume a 360-day year) is ________.
7.3%
Tangshan Mining borrowed $100,000 for one year under a line of credit with a stated interest rate of 7.5 percent and a 15 percent compensating balance. Normally, the firm keeps almost no money in its checking account. Based on this information, the effective annual interest rate on the loan is ________.
8.8%
One advantage of factoring accounts receivable is the ability it gives a firm to turn accounts receivable immediately into cash without having to worry about repayment.
T
3/10 net 45 EOM translates as ________.
a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the balance is due 45 days after the end of the month
A terminal warehouse is ________
a central warehouse storing the merchandise of various customers
Pledges of accounts receivable are made on ________ basis, respectively.
a nonnotification and a notification
________ are the major source of unsecured short-term financing for business firms.
accounts payable
________ are liabilities for services received for which payment has yet to be made
accruals
Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, ________
but the presence of collateral has no impact on the risk of default
A large portion of the commercial paper is issued by ________.
commercial finance companies
A U.S.-based company that exports goods and has accounts receivable denominated in a foreign currency ________.
faces the risk that the U.S. dollar will appreciate in value relative to the foreign currency
Revolving credit agreements are ________.
guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time
The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan rate.
lower than
As sales increase, a company needs more inventory and more employees resulting in ________.
more accounts payable and accruals, and therefore increasing its spontaneous liabilities
Short-term loans that businesses obtain from banks and through commercial paper are ________.
negotiated and unsecured
In a line of credit arrangement, a firm pays interest on ________.
only the amount actually borrowed
A ________ guarantees the borrower that a specified amount of funds will be available regardless of the scarcity of money
revolving credit agreement
Financing that matures in one year or less and has specific assets pledged as collateral is called ________.
secured short-term financing
Collateral is typically required for a ________
secured short-term loan
Seasonal buildups of inventory and receivables are generally financed with ________.
short-term loans
Commercial paper issues have maturities ranging from ________.
three days to 270 days
If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill ________.
on the last day of the credit period
If a firm decides to take the cash discount that is offered on goods purchased on credit, the firm should ________.
pay on or before the last day of the discount period
When a firm stretches accounts payable without hurting its credit rating, the cost of giving up a cash discount is ________.
reduced
A loan that is usually a one-time loan made to a borrower who needs funds for a specific purpose for a short period is called a ________
single-payment note
In a revolving credit agreement, the firm pays interest on ________
the amount actually borrowed and commitment fees on any unused portion of the loan
The prime rate of interest fluctuates with ________
the changing supply-and-demand relationship for short-term funds
The interest rate on a line of credit is normally stated as a fixed rate-the prime rate.
F
The outright sale of accounts receivable at a discount in order to obtain funds is called pledging accounts receivable
F
________ involves the sale of accounts receivable.
Factoring
F
Inventory is more attractive than accounts receivable as a short-term collateral since it normally has a market value greater than its book value, which is used to establish its value as collateral
Cull Incorporated recently borrowed $250,000 from Century Bank when the prime rate was 4%. The loan was for 90 days with interest to be paid at the end of the period with a rate fixed at 1.5% above the prime rate. What is the total interest paid on this loan and what is the effective annual rate? (Assume a 365 day year.
The total interest paid is $3,390.41 and the effective annual rate is 5.62%
Which of the following creates a secured short-term loan with accounts receivable?
pledge of accounts receivable
Accruals and accounts payable are ________.
spontaneous and unsecured sources of short-term financing
A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000 for one year. The stated interest rate is ________ and the effective interest rate is ________.
unknown
Notes payable are either spontaneous secured or spontaneous unsecured financing and result from the normal operations of a firm.
F
A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is ________.
8.9%
A firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a year. What is the effective rate of interest on this loan if the interest is paid in advance?
9.9%
A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.
F
A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms with a high credit standing
F
A trust receipt inventory loan is an arrangement in which the lender receives control of the pledged inventory collateral, which is stored by a designated agent.
F
Accounts payable are spontaneous secured sources of short-term financing that arise from the normal operations of a firm.
F
Commercial finance companies are lending institutions that make only unsecured loans-both short-term and long-term—to businesses
F
Factoring accounts receivable is relatively an expensive source of unsecured short-term funds.
F
Factoring accounts receivable is relatively an inexpensive source of unsecured short-term funds
F
Factoring accounts receivable is relatively an inexpensive source of unsecured short-term funds that allows firms to turn accounts receivable immediately into cash
F
Fixed assets are the most desirable short-term-loan collateral since they normally have a longer life, or duration, than the term of the loan.
F
For firms that are in a financial position to take a cash discount, it is advisable not to take the discount if the terms offered are 2/10 net 30.
F
Self-liquidating loans are mainly invested in productive assets (i.e., fixed assets) which provide the mechanism through which the loan is repaid.
F
Spontaneous unsecured financing has a specific interest cost associated with it that can be at a fixed or floating rate.
F
The interest rate charged on secured short-term loans is always equal to the rate on unsecured short-term loans.
F
Under the floating inventory lien, the borrower is free to sell the merchandise and is expected to remit the amount lent against each item, along with accrued interest, to the lender immediately after the sale. The lender then releases the lien on the appropriate item.
F
A compensating balance is a checking account balance equal to a certain percentage of the amount borrowed from a bank under a line-of-credit or revolving credit agreement.
T
A floating inventory lien is a lender's claim on the borrower's general inventory as collateral for a secured loan
T
A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.
T
A line of credit is an agreement between a commercial bank and a business, specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.
T
Accounts payable results from transactions in which merchandise is purchased but no formal note is signed to show the purchaser's liability to the seller.
T
Commercial finance companies usually charge a higher interest on secured short-term loans than commercial banks because the finance companies generally ends up with higher-risk borrowers
T
Factoring accounts receivable is relatively an expensive source of secured short-term funds that allows firms to turn accounts receivable immediately into cash.
T
For firms that are in a financial position to take a cash discount, it is advisable to take the discount if the terms offered are 2/10 net 30.
T
If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced.
T
In giving up a cash discount, the amount of the discount that is given up is the interest being paid by a firm to keep its money by delaying payment for a number of days
T
Lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default.
T
Operating change restrictions are contractual restrictions that a bank may impose on a firm as part of a line of credit agreement
T
Secured short-term financing has specific assets pledged as collateral
T
Self-liquidating loans are intended merely to carry a firm through seasonal peaks in financing needs that are due primarily to buildups of accounts receivable and inventory.
T
The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days
T
The effective interest rate on a bank loan depends on whether interest is paid when the loan matures or in advance.
T
The major attraction of a line of credit from the bank's point of view is that it eliminates the need to examine the creditworthiness of a customer each time it borrows money within the year.
T
The security agreement is an agreement between the borrower and the lender that specifies the collateral held against a secured loan.
T
Unlike the spontaneous sources of unsecured short-term financing, bank loans are negotiated and result from deliberate actions taken by the financial manager.
T