Foundations of Financial Mgmt: Ch 8-2
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What is generally the largest source of short-term credit small firms?
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Trade credit
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Trade credit may be used to finance a major part of the firm's working capital when
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the firm extends less liberal credit terms than the supplier.
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A large manufacturing firm has been selling on a 3/10
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net 30 basis. The firm changes its credit terms to 2/20 net 90. What change might be expected on the balance sheets of its customers?,Increased payables and decreased bank loans
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The cost of not taking the discount on trade credit of 3/10 net 30 is equal to
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55.67%
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Large firms tend to be
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net suppliers of trade credit.
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From the banker's point of view short-term bank credit is an excellent way of financing
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seasonal bulges in inventory and receivables.
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The cost of not taking the discount on trade credit of 2/20 net 60 is equal to
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18.36%
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Bank loans to business firms
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are usually short-term in nature. are preferred by the banker to be self-liquidating. may require compensating balances.
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Commercial bank term loans
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are offered to superior credit applicants.
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Kantorovich Company normally takes 30 days to pay for its average daily credit purchases of $2.000. Its average daily sales are $3000
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and it collects accounts in 25 days. What is its net credit position? Note that a negative position implies receivables exceed payables.,($15.000)
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The problem facing the US financial system in the late 1980s and early 1990's had which of the following characteristics?
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Collapse of real estate values. International banking competition. Increased debt in highly leveraged companies
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The prime rate
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has been quite volatile during the past two decades moving as much as 8 percentage points in a 12-month period.
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The London Interbank Offered Rate (LIBOR)
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competes with the U.S. prime rate for those companies with an international presence. has been lower than the U.S. prime rate for at least the last decade.
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LIBOR is
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an interest rate paid on Eurodollar loans in the London market.
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Compensating balances
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are used by banks as a substitute for charging service fees.
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General Rent-All's officers arrange a $50.000 loan. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called
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a compensating balance.
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Analog Computers needs to borrow $800.000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $800
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000 spendable cash?,$941,177
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If Analog computers can borrow at 9.5% for 3 years what is the effective rate of interest on a $800.000 loan where a 15% compensating balance is required?
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11.18%
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A term loan is usually characterized by
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maturity of one to seven years. a variable interest rate. monthly or quarterly installment payments.
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In determining the cost of bank financing
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which is the important factor?,Effective rate
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Mr. Jones borrows $2.000 for 90 days and pays $35 interest. What is his effective rate of interest?
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7.0%
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Von Hayek's Kayaks can borrow $10.000 for 60 days at a cost of $200 interest. What is the effective rate of interest?
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More than 11.5 percent
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Kenneth's Arrows and Bows borrow $10.000 for one year at 12 percent interest. What is the effective rate of interest if the loan is discounted?
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More than 13.5 percent but less than 14.5 percent
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East Coast Cleaners borrows $10.000 for 90 days and pays $210 interest. What is the effective rate of interest if the loan is discounted?
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More than 8.4 percent but less than 8.6 percent
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Ms. Smith borrowed $1.250 at an 11% stated rate of interest and was to pay back the loan in 24 monthly payments. What is her effective rate of interest?
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21.12%
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The required compensating balance is usually computed as a
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percentage of customer loans outstanding. percentage of the bank's commitments toward future loans.
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Holland Construction Co. has an outstanding 180-day bank loan of $400.000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.
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11.18%
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Koopman's Chickens Inc. plans to borrow $300.000 from its bank for one year. The rate of interest is 10 percent but a compensating balance of 15 percent is required. What is the effective rate of interest?
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More than 11.6 percent but less than 11.8 percent
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Friedman Roses Inc. needs $80.000 in funds for expansion. With a compensating balance requirement of 20% how much will the firm need to borrow?,
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$100.000
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Commercial paper is very popular with many firms because
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it can usually be issued below the prime rate.
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The Truth in Lending law is designed to protect
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consumers.
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Commercial paper has which of the following advantages to the issuer:
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It may be issued below the prime rate. It requires no compensating balances.
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Which of the following is not a characteristic of commercial paper?
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One-to-two year maturity.
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Commercial paper that is sold without going through a broker or dealer is known as
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direct paper.
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Commercial paper that is sold without the use of an actual paper certificate is known as
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book-entry paper.
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Which of the following is not a true statement about commercial paper?
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Dealer paper is sold directly to the lender by a finance company.
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Multinational firms have found that they can lower borrowing costs
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by borrowing Eurodollars at a lower rate than the U.S. prime rate. by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime and then converting these foreign loans into dollars.
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Accounts receivable may be used as a source of financing by
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pledging the receivables as loan collateral. factoring the receivables to a finance company. selling securities backed by the receivables.
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Which of the following best describes the benefits to the borrower of selling asset backed securities?
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The borrower trades future cash flows for current cash flows. The asset-backed security is likely to carry a high credit rating of AA or better.
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Which of the following is the largest category of asset-backed securities?
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Home Equity Loans
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The extent to which inventory financing may be used depends on
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marketability of pledged goods. price stability of goods. perishability of goods.
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Which of the following is not a method for lenders to control pledged inventory?
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Factoring
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Which method of controlling pledged inventory provides the greatest degree of security to the lender?
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Warehousing
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Which of the following is not a method for controlling pledged inventory?
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each of the above is an inventory control method
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Hedging refers to
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a transaction that reduces risk exposure.
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The financial futures market
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allows for the delivery of financial instruments at a future point in time.
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Firms exposed to the risk of interest rate changes may reduce that risk by
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hedging in the financial futures market.
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A firm has invested in corporate bonds
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it may engage in a financial futures contract in order to protect itself from rising interest rates.
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The effective rate on an $10.000 installment loan with bi-monthly payments
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$1.600 in interest for 2 years is:,14.8%
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All of the following are evident during a credit crunch:
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the Fed tightens money supply. higher business requirements for funds. massive withdrawals of savings depositsAll of the following are benefits of commercial paper to the corporation:,it is often issued at below the prime interest rate. there are no compensating balance requirements. they provide prestige
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The reasons why a company may choose to pledge accounts receivable are all of the following:
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borrowing capacity fluctuates with A/R. provides another source of financing for companies with lower credit ratings
