FIN 302 Ch 4

True or false: Other important sources of short-term financing for a company include short-term stocks.

False

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

(1+r)

For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)

- 1 divided by - the reciprocal of

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

True or false: Cash collections equals beginning cash times sales.

False

True or false: The net payments receivable equals the cash collections minus the cash disbursements.

False

True or false: The operating cycle equals current assets minus current liabilities.

False

True or false: The present value is the sum of all expenses in a project.

False

True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

False

FV = _____ ×(1 + r)t

PV

If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?

PV = FV/(1+r)

Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r per cent interest?

PV = FV/(1+r)^t

The basic present value equation is:

PV = FVt/(1 + r)t

What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?

The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.

True or false: A stock-out occurs if a store runs out of inventory and could result in lost customers.

True

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

True

True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

True

True or false: The cash cycle is equal to the operating cycle minus the accounts payable period.

True

True or false: The formula for a present value factor is 1/(1+r)^t

True

The idea behind ______ is that interest is earned on interest.

compounding

The process of accumulating interest in an investment over time to earn more interest is called _________.

compounding

Ending accounts receivable equals starting accounts receivable plus ______ minus collections.

credit sales

A short-term financial policy involving a higher proportion of long-term debt than short-term debt is classified as a(n) ______ policy.

flexible

With the _____ approach, a firm uses a pool of marketable securities as a buffer against changing current asset needs.

flexible

The amount an investment is worth after one or more periods is called the _____ value.

future

Security for short-term loans usually consists of accounts receivable, ____ , or both.

inventories

Dividend payments belong to the category of ___.

long-term financing expenses

With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.

present; future

Carrying costs ______ with the level of investment in current assets.

rise

Unsecured bank loans are:

short term

With _____ interest, the interest is not reinvested.

simple

The difference between the ______ cycle and the accounts payable period is the ______ cycle.

- operating - cash

A restrictive short-term financing strategy implies ___.

- possible cash shortages - a small investment in net working capital

Under a factored receivables arrangement

- receivables are sold at a discount - collection of the receivables is the factor's responsibility

The main problems with maturity mismatching (financing long-term assets with short-term debt) are that it ___.

- requires frequent refinancing - is risky

Either stock-out or cash-out costs occur when a firm ___.

- runs out of available cash - runs out of inventory to sell

The cash budget allows the firm to identify:

- short-term financial needs - short-term financial opportunities

The two major elements of a firm's short-term financial policy are ___.

- the size of the firm's investment in current assets - the financing of current assets

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.4400

Which formula below represents a present value factor?

1/(1+r)^t

The payables period equals ____ days divided by the payables turnover.

365

Using the PV, discount rate, and ________, you can determine the number of periods.

FV

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV×(1 + r)^t

True or false: Future value refers to the amount of money an investment is worth today.

False

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

False

True or false: If you invest for two periods at an interest rate of r, then your money will grow th (1 + r) per dollar invested.

False

True or false: The collection cycle is the difference between disbursement and collection of cash.

False

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False

What does maturity hedging involve?

Financing fixed assets with long-term financing and inventories with short-term financing

True or false: The payables turnover equals the cost of goods sold divided by the average payables.

True

The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at ___.

a minimum

A flexible short-term financing strategy implies surplus cash and little borrowing, but the advantage of such a strategy is:

a reduced probability of financial distress

Although flexible short-term financial polices are more costly, they result in _____.

a reduced probability of financial distress

The optimal balance of current _____ occurs where the sum of the carrying costs and the shortage costs is at a minimum.

assets

The opportunity costs of holding current assets are called ______ costs.

carrying

Future value is the ______ value of an investment at some time in the future.

cash

Future value is the ________ value of an investment at some time in the future.

cash

The primary tool in short-term financial planning is the _______.

cash budget

Shortage costs are those that ______ when the level of investment in current assets is high.

fall

The present value is the current value of the _______ cash flows discounted at the appropriate discount rate.

future

When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.

longer; greater

Firms who attempt to match the maturity of assets and liabilities are said to employ __________.

maturity hedging

The current value of a future cash flow discounted at the appropriate rate is called the _____ value.

present

The real world has moved away from using _____________________________ for calculating future and present values.

time value of money tables

If you invest at a rate of r for ______ periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

two

A(n) ______ bank loan requires no security or collateral.

unsecured

Which of the following is not a characteristic of commercial paper?

Maturities of 1 year or more

The _______ rate can be found using the PV, FV, and t.

discount

The difference between cash collections and cash disbursements is the predicted ______.

net cash inflow

The financing of current assets is measured by the proportion of:

short-term debt and long-term debt used to finance current assets

Ideally, short-term assets are financed with ___.

short-term liabilities

Which of the following increase the cash cycle?

- A longer inventory period - A longer receivables period

Which of the following are generally used as security for short-term secured loans?

- Accounts receivable - Inventory

Which of the following methods are used to calculate present value?

- An algebraic formula - A financial calculator - A time value of money table

Which of the following are the primary as well as easy ways used to perform financial calculations today?

- Financial calculator - Spreadsheet functions

Which of the following are shortage costs?

- Safety reserve costs - Order costs

Which of the following are typical inventory loans?

- Trust receipt - Field warehouse financing - Blanket inventory lien

Which of the following are examples of cash disbursements?

- Wages and taxes - Capital expenditures - Payments of accounts payable

A flexible short-term financing strategy implies:

- a relatively large pool of marketable securities - cash surpluses

Non-committed lines of credit ___.

- are informal arrangements - generally specify a maximum amount that can be borrowed

Other important sources of short-term financing besides secured and unsecured borrowing for a company are:

- commercial paper - trade credit

The two types of accounts receivable financing are ___ and ____.

- factoring - assignment

With the flexible approach, the firm finances ____ , while with the restrictive approach, the firm finances ____ .

- internally - externally

For US corporations, current assets have fallen from 50% of total assets in the 1960s to 40% of total assets today primarily because of more efficient:

- inventory management - cash management

Time value of money tables are not as common as they once were because:

- it is easier to use inexpensive financial calculators instead - they are available for only a relatively small number of interest rates.

Between the 1960's and the present time, current liabilities have risen from about 20% of total liabilities to almost _______ percent.

30

Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?

=PV(0.10,5,0,-300)

Under which type of inventory loan does the lender have a lien against all of the borrower's inventory?

A blanket inventory lien

The shorter the cash cycle, the lower the firm's investment in ______.

- inventories - accounts receivable

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

Because the $100 is an outflow from you which should be negative.

The cash cycle is equal to the operating cycle minus the ______ period.

accounts payable

The operating cycle equals the sum of the inventory period and the ______ period.

accounts receivable

The difference between the operating cycle and the accounts payable period is the ______.

cash cycle

The time between paying cash for inventory and receiving cash from selling a product is called the ______.

cash cycle

A committed line of credit is a more formal arrangement typically involving a _______ .

commitment fee

Commercial paper is an example of a:

debt security

Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.

discounted cash flow (DCF)

A restrictive short-term financial policy implies a ______ proportion of short-term debt relative to long-term debt.

high