FIN CH. 15

What is the primary advantage of a firm that is able to issue commercial paper to finance its short-term assets?

Interest rates on commercial paper are generally lower than rates on bank loans.

Which of the following is not an advantage of trade credit?

The cost of forgoing the discount is less than the prime rate.

If a firm relies on short-term debt or current liabilities in financing its asset investments, and all other things remain the same, what can be said about the firm's liquidity?

The firm will be relatively less liquid.

With regard to the hedging principle, which of the following would be an appropriate method to finance a minimum level of current assets required for year round operations?

common stock

Which of the following is considered a spontaneous source of financing?

accounts payable

Working capital includes all of the following except:

accounts payable.

Which of the following sources of short-term financing is likely to have the highest interest rate?

accounts receivable loan (pledging of accounts receivable)

Key Enterprises borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Key paying a total of $12,400. What is the approximate cost of credit using the APR , or annual percentage rate, calculation?

10.00%

Key Enterprises borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Key paying a total of $12,400. What is the approximate cost of credit using the APY , or annual percentage yield, calculation?

10.34%

The Stuart Glass Company established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement, Stuart had no deposit with the bank. Shortly after signing the agreement, Stuart needed $240,000 to pay off a note that was due. It borrowed the $240,000 from the bank by drawing on the line of credit. What is the effective annual cost of credit?

10.67%

Florida Grape Growers (FGG) has a line of credit with Trust Company Bank that allows FGG to borrow up to $400,000 at an annual interest rate of 11 percent. However, FGG must keep a compensating balance of 25 percent of any amount borrowed on deposit at the Trust Company. FGG does not normally have a cash balance account with the Trust Company. What is the effective annual cost of credit?

14.67%

A company that forgoes the discount when credit terms are 2/10 net 60 is essentially borrowing money from his supplier for an additional:

50 days.

The Stoney River Pennant Company uses commercial paper to satisfy part of its short-term financing requirements. Next week, it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum. In addition, Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper. What is the effective annual cost of credit to Stoney River?

7.7%

Which of the following is a disadvantage of the use of current liabilities to finance assets?

greater risk of illiquidity

A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate:

less than 14.69%.

Which of the following is an unsecured short-term bank loan made for a specific purpose?

transaction loan