Finance
The LEQ Company has $150,000 every month in accounts payable. The vendor offers payment terms of 3/10 n 30. If LEQ does not take the discount, what is the annual cost to LEQ of not taking the discount?
54,000 150 x 3% x 12
A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6%. As a condition of the loan, the company is required to maintain a balance of $25,000 in its checking account, which earns 2%. What is the effective interest rate of the loan?
6.44 Loan amount x annual interest amount to be maintained 25k x 2% minus maintaining and loan amount avail for utilization = loan amount less maintaining balance EI = (net interest cost/ loan amount available for utilization)x 100
A company is looking to decrease its working capital. Which action or actions below would decrease its working capital? a - Recognize insurance expense from prepaid insurance b - Recognize deferred revenue as earned revenue c- Use cash to repay long-term debt
A and C
All of the following statements relating to inventory turnover ratio are correct, except: a- A low inventory turnover ratio indicates an "over investment" in inventory. b- A decreasing inventory turnover ratio indicates that a firm is holding its inventory for a shorter period than earlier. c - A high inventory turnover ratio can lead to a high gross profit margin. d - Using the first in first out method of inventory valuation during a period of inflation may lead to an understatement of the inventory turnover ratio.
A decreasing inventory turnover ratio indicates that a firm is holding its inventory for a shorter period than earlier. - should be longer
Which of the following is the correct definition of a repurchase agreement (repo)?
A marketable security that consists of someone temporarily buying someone's government security with an agreement for the seller to repurchase it at a later date for a specific price
Which of the following items are included in the calculation of working capital A - prepaid expenses B - unearned revenue C - accounts receivable D - long term debt E - marketable securities
ABCE
Which of the following is correct concerning default risk?
As default risk decreases, the allowance for doubtful account will decrease. - Default risk is the risk that a debtor will not pay a debt. As this risk decreases, the allowance for doubtful accounts will likely decrease as a smaller amount of gross receivables will be estimated to be uncollectible.
Which of the following statements is true regarding the yields (returns)/risk nature of various marketable securities?
Commercial papers have a higher yield than t bills
Alpha Company is offering its credit customers the choice of a cash discount of 2% for payment within 30 days of the invoice date or for paying in full within 65 days. Assume a 365 days' year. What is the effective annual interest rate of the early settlement discount (to the nearest 0.01%) using compound interest methodology?
Correct. If customers pay within 30 days, it would be 35 days earlier (65 days − 30 days) Number of compounding periods = 365 ÷ 35 = 10.429 1 + r = (1 ÷ 0.98)10.429 1 + r = 1.2345 r = 23.45% The effective annual interest rate of the early settlement discount is 23.45%.
The Fanthom Company is located in X City but has a number of customers all over North America. In order to reduce the total float of collecting payments from its geographically dispersed customers, the firm has decided to opt for a lockbox system, after performing a cost benefit analysis. The firm has entered into a lockbox arrangement with ABC Bank. The lockbox system will cost $0.24 per check and 0.06% of the total receipts from sales. The firm anticipates revenues worth $1,260 million, with an average invoice of $3,000. It borrows funds at the rate of 12% per annum. The Fanthom Company has estimated that the lockbox system will save $400,000 annually. There are 360 days in a working year. How many days does the Fanthom Company expect the lockbox arrangement to save in the collection process (rounded off to two decimal places)?
Correct. Number of invoices: $1,260 million ÷ $3,000 = 420,000. Cost of the lockbox system + Net annual benefit = Interest savings. Cost of the lockbox system = ($1,260 million × 0.06%) + (420,000 invoices × $0.24) = $756,000 + $100,800 = 856,800 Net annual benefit = $400,000 (given) $856,800 + $400,000 = (Days ÷ 360) × $1,260 million × 12% $1,256,800 = (Days ÷ 360) × $151.2 million $1,256,800 = Days × $420,000 Number of days saved = $1,256,800 ÷ $420,000 = 2.99 days.
The BNH Company sells $25,000 in receivables for a factor fee of 3%. Receivables are typically collected in one month. What is BNH's annual effective cost of this factor relationship?
Correct. One way companies can get cash from their accounts receivable faster is to factor the receivables. Factoring means to sell the rights to accounts receivable in exchange for cash. The factor withholds a percentage of the factored receivables to cover its costs as well as its profit margin. This fee reduces the proceeds the company receives, which increases the effective cost of the arrangement. The fee in this arrangement is $750 (3% × $25,000). This means BNH receives $24,250 from the factor ($25,000 − $750). This translates into an effective cost of 3.09% for one month ($750 / $24,250). It is measured as one month since receivables are collected in one month. Multiplying by 12 to put it on an annual basis results in an annual effective cost of 37.08% (3.09% × 12).
Astra Ventures (AV) avails the services of factor for managing its accounts receivables. The factor charges a fee of 2% of the face value of the receivables. As a cover for probable sales returns, the factor requires AV to maintain a 7% reserve. An interest charge at the rate of 15% per annum is levied on the remaining amount that is advanced to AV. What would be the amount received by AV (rounded to the nearest dollar) from the factor at a time when it hands over a receivable account worth $250,000 which is due in 75 days? Assume a 365 days' year.
DollarsReceivables amount250,000 Less: Factor fees @ 2% of $250,000(5,000) Less: Reserve amount @ 7% of $250,000(17,500) Gross proceeds227,500 Gross proceeds227,500 Less: Annualized interest[(227,500 × 0.15) × (75 ÷ 365)](7,012) Net proceeds220,488
A shirt making factory uses the economic order quantity (EOQ) model to plan its ordering quantity for its principal raw material. In the recent times, due to expansion of the manufacturing facilities, the annual demand for the material has increased by 50%. What would be the effect of the above increase on the EOQ? remain unchanfed EOQ increase by more than 50% EOQ increase by less than 50% EOQ will increase by exactly 50%
EOQ increase by less than 50%
Which of the following reasons would not be considered a benefit of using U.S. Treasury securities as a marketable security?
High rate of return
Which of the following statements about just-in-time (JIT) inventory management is not correct?
Just-in-time inventory management is a "push" inventory system. - PULL
Which of the following is most likely to be a major factor in determining a company's optimal credit policy?
Management's risk tolerance.
Pledging vs Factoring
Pledging accounts receivable is when a company uses its accounts receivable as collateral for a loan while factoring accounts receivable is when a company sells the rights to its accounts receivable.
BK is a building supplies company that sells products to both commercial and private customers. Recently, the company has had some liquidity issues. The finance manager has suggested that the company needs to strengthen its cash management system and ensure that unexpected expenses are met with ease. For this, she has proposed that the company invest in marketable securities which are highly liquid but carry low risk. The proposal of the finance manager is associated with which of the following motives of holding cash? transaction precautionary speculative compliance
Precautionary motive - firms have cash reserves for unexpeccted or emergency cash needs which cannot be planned ahead
Which one of the following would increase the working capital of a firm?
Refinancing of accounts payable with a two-year note payable
Which of the following statements is correct concerning investing in risky securities? a - Risk-averse investors would not invest in risky securities. b - Risk-averse investors require higher expected returns to convince them to invest in risky securities. c - Risk-neutral investors require higher expected returns to convince them to invest in risky securities. d - Risk-seeking investors require higher expected returns to convince them to invest in risky securities.
Risk-averse investors require higher expected returns to convince them to invest in risky securities.
A company wants to invest some funds that it does not want to lose in marketable securities. What feature of marketable securities is most relevant to this company?
Safety - focus on the risk that the value of marketable security will decrease - lower yiled
Which of the following statements made about factoring is correct?
The factor's fees will be higher in the case of a "without recourse" factoring service.
Your firm has a quick ratio of 0.9 and a current ratio of 2.1. Industry averages are 1.0 for the quick ratio and 2.0 for the current ratio. Which of the following is true about the firm's working capital position?
The firm has more inventory than other firms in the industry.
Which of the following is not an advantage to a corporation that uses the commercial paper market for short-term financing?
There are no restrictions as to the type of corporation that can enter into this market.
A working capital technique that increases the payable float and, therefore, delays the outflow of cash is:
a draft - delay outflow - third party instru,emt
A company wants to invest some funds in marketable securities. It wants to maximize the interest earned on this investment. Which marketable security below would best fit this company's needs?
commercial paper
Which of the following factors is least likely to influence the level of a company's accounts receivable?
companys cost of capital
Working Capital
current assets - current liabilities ability to pay short term obligations (liquidity)
All of the following are valid reasons for a business to hold cash and marketable securities except to: meet future needs maintain adequate cash needed for transactions earn maximum returns on investment asset satisfy compensating balance requirement
earn maximum returns on investment assets
Carrying Cost
incurred to hold inventory. inventory level increase, carrying cost increase. warehouse cost, handling cost, other cost incurred to store in inventory
A company is looking to increase its working capital. Which action below would increase its working capital?
issuing long term debt
A company wants to invest some funds in marketable securities until it needs the funds for a bond payment in 90 days. What feature of marketable securities is most relevant to this company? yield liquidity maturity safety
maturity
Accounts Receivable Turnover
net credit sales/average net accounts receivable
The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm's maturing obligations is the policy that finances: permanent current asset with short term debt fluctuating current asset with long term debt permanent current asset with long term debt all current asset with long termd ebt
permanent current assets with short term debt - permanent current assets should be financed with long term liabilities
Which of the following statements is correct concerning commercial paper?
shot term unsecured notes payable issued by a large company with high credit rating
Stock-out costs refer to:
the lost revenue associated with not being able to fulfill customers' orders in a timely manner.
Which of the following is not a method a company can use to accelerate cash collections?
using a zero balance account
Decrease working capital using cash on hand to buy a piece of land using cash on hand to pay acciunts payable using cash on hand to buy marketable secutiries using cash on hand to pay for 12 month rental when signing rental agreemetn
using cash on hand to buy a piece of land
Can the economic order quantity formula be used to determine the optimum size of a production run and purchase order, respectively?
yes yes