FINANCE final

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 percent

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 percent

Tina's Apple Company would like to manufacture and market a new packaging. Tina's has sold an issue of commercial paper for $1,500,000 and maturity of 90 days to finance the new project. Compute the annual interest rate on the issue of commercial paper if the value of the commercial paper at maturity is $1,650,000 (assuming 360 days in a year).

: Interest paid = $1,650,000 - 1,500,000 = $150,000 Annual interest rate = ($150,000/$1,500,000) (360/90) = 40%

________ involves the sale of accounts receivable.

Factoring

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 $3390.41 and the effective annual rate is 5.62%.

1/15 net 30 date of invoice translates as ________.

a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the invoice date

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

Credit terms 2/10, net 30 means ________.

a discount of 2% is granted if payments are done within 10 days, net 30 days available

Compared to a line of credit, a revolving credit agreement will be ________ for a firm.

a higher cost, lower risk method of short-term borrowing

A letter written by a company's bank to the company's foreign supplier, stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met is called ________.

a letter of credit

Pledges of accounts receivable are made on ________ basis, respectively

a nonnotification and a notification

A field warehouse is ________.

a warehouse on the borrower's premises

The two major sources of short-term financing are ________.

accounts payable and accruals

Which of the following is an advantage of factoring?

accounts receivable immediately turned into cash

An appropriate collateral for a secured short-term loan is ________.

accounts receivables

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

The primary source of secured short-term loans to businesses are ________.

commercial banks and commercial finance companies

A large portion of the commercial paper is issued by ________.

commercial finance companies

A ________ is a short-term, unsecured promissory note issued by firms with a high credit standing. These notes are primarily issued by commercial finance companies.

commercial paper

A(n) ________ effectively raises the interest cost to the borrower on a line of credit.

compensating balance

Short-term, self-liquidating loans are intended to ________.

cover seasonal peaks in financing caused by inventory and receivable buildups

Loans on which the interest is paid in advance are often called ________.

discount loans

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

A ________ agreement normally states the exact conditions and procedures for the purchase of an account.

factoring

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should ________.

give up the cash discount and pay on the 70th day after the date of sale

Revolving credit agreements are ________.

guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time

The effective interest rate generally is ________.

higher if the loan is a discount loan

Which of the following is a disadvantage of factoring?

highly expensive source of short-term financing

A ________ is an agreement between a commercial bank and a business that states the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time, provided sufficient funds are available.

line of credit

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

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

In a line of credit arrangement, a firm pays interest on ________.

only the amount actually borrowed

Appropriate collateral for a loan secured under a floating inventory lien is ________.

paper clips

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

Which of the following creates a secured short-term loan with accounts receivable?

pledge of accounts receivable

The ________ is the lowest rate of interest charged on business loans by the nation's leading banks to their best business borrowers.

prime rate

As part of a union negotiation agreement, the United Clerical Workers Union conceded to be paid every two weeks instead of every week. A major firm employing hundreds of clerical workers had a weekly payroll of $1,000,000 and the cost of short-term funds was 12 percent. The effect of this concession was to delay clearing time by one week. Due to the concession, the firm ________.

realized an annual savings of $120,000

When a firm stretches accounts payable without hurting its credit rating, the cost of giving up a cash discount is ________.

reduced

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

The major type of loan made by banks to businesses is the ________.

short-term, self-liquidating loan

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

Which of the following are the three basic ways of lending unsecured, short-term funds by commercial banks?

single-payment note, lines of credit, and revolving credit agreements

Commercial paper is ________.

sold at a discount from its par value

Accruals and accounts payable are ________.

spontaneous and unsecured sources of short-term financing

A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should ________.

take the cash discount, financing the purchase with the line of credit, the cheaper source of funds

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

One of the most common designations for the beginning of the credit period is ________.

the date of invoice

The cost of giving up a cash discount on a credit purchase is ________.

the implied interest rate paid in order to delay payment for an additional number of days

Commercial paper issues have maturities ranging from ________.

three days to 270 days

Lenders of secured short-term funds prefer collateral ________.

to reduce the losses if the borrower defaults

Appropriate collateral for a loan secured under a trust receipt inventory loan is ________.

vehicles

With a floating-rate note, the interest rate on the note changes ________.

when the prime rate changes

Bessey Aviation has just sold an issue of 30-day commercial paper with a face value of $5,000,000. The firm has just received $4,958,000. What is the effective annual interest rate on the commercial paper?

{($5,000,000 - $4,958,000)/$4,958,000} × 12 = 10.17%

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

Commercial paper is issued in multiples of ________.

$100,000 or more

A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent. If the loan is for $100,000, how much interest in dollars will the firm pay? (Assume a 360-day year.)

$3,333

Jannet Company, currently pays its employees at the end of a week. The weekly payroll totals $400,000. If it were to extend the pay period so as to pay its employees 1 week later throughout an entire year, the employees would in effect be lending the firm ________ for a year.

$400,000

XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2 percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after two months. This was the only change. How much interest must XYZ corporation pay?

$5,417

A firm purchased goods on January 27 with a purchase price of $1,000 and credit terms of 2/10 net 30 EOM. The firm paid for these goods on February 9. The firm must pay ________ for the goods.

$980

A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The firm paid for these goods on the 5th day after the date of sale. The firm must pay ________ for the goods.

$990

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 ________.

12.00%; 13.64%

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 percent

The cost of giving up a cash discount under the terms of sale 5/20 net 120 (assume a 360-day year) is ________.

18.9 percent

The stated cost of a pledge of accounts receivable is normally ________ above the prime rate.

2 to 5 percent

A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for $1,900,000. The annual interest rate on the issue of commercial paper is ________ (assume 360 days in a year).

21.05 percent

Tangshan Mining has extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, is 75.26 percent. If the firm were able to stretch its accounts payable to 60 days without damaging its credit rating, the cost of giving up the cash discount would only be ________.

25.09%

A single-payment note generally has a maturity of ________.

30 days to 9 months or more

Tangshan Mining issued $1,000,000 of commercial paper for $992,500 for 45 days. Based on this information, the effective annual rate of interest on the commercial paper would be ________ (assume 360 days in a year).

6.20%

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 percent

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 a balance of about $10,000 in its checking account. Based on this information, the effective annual interest rate on the loan is ________.

7.89%

Tangshan Mining has extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, would be ________.

75.26%

Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, would be ________. If the firm were able to stretch its accounts payable to 60 days without damaging its credit rating, the cost of giving up the cash discount would only be ________.

75.26%; 25.09%

Tangshan Mining borrowed $100,000 for one year under a revolving credit agreement that authorized and guaranteed the firm access to $200,000. The revolving credit agreement had a stated interest rate of 7.5 percent and charged the firm a 1 percent commitment fee on the unused portion of the agreement. Based on this information, the effective annual interest rate on the loan is ________.

8.5%

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%

Discuss and contrast the three types of loans discussed in the text that use inventory as collateral: floating inventory liens, trust receipt inventory loans, and warehouse receipt loans

A floating inventory lien is certainly the easiest for a firm since the lender just takes a lien against the firm's entire inventory and the borrower typically does not have to give the lender a precise list of what constitutes inventory on a regular basis. Trust receipt financing requires the borrower and lender to specify the exact inventory that backs up each advance. This can be a time-consuming and cumbersome type of financing for the firm. Field warehouse financing requires an independent company to supervise the collateral for the lender. A terminal warehouse is a central warehouse storing the merchandise of various customers

________ 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

________ ensure that money lent under a line of credit agreement is actually being used to finance seasonal needs.

Annual cleanups