Question 1

The Omega Corp.plans to borrow $10,000 for a 2 months.At maturity,Omega will repay the $10,000 principal plus $100 interest.What is the annual percentage rate (APR)rate of interest on this loan?
A)6%
B)1%
C)4%
D)6.4%

Accepted Answer

The interest for 2 months is $100, which is 1% of $10,000. To find the annual rate, multiply by 6 (since there are six 2-month periods in a year): 1% * 6 = 6%.

Question 2

Which of the following comparisons between short-term bank loans is correct?
A)Commercial paper interest rates are usually slightly higher than rates on bank loans.
B)Commercial paper is only appropriate for firms requiring a limited amount of short-term financing,while banks can offer substantially larger amounts of funds.
C)Banks demand that borrowers meet exacting credit-worthiness tests,while the lenders that purchase commercial paper are less strict.Only the most credit-worthy borrowers have access to bank loans.
D)Commercial paper is less flexible than a line of credit,but the interest rate is lower.

Accepted Answer

Commercial paper typically offers lower interest rates compared to bank loans due to its unsecured nature and the high credit quality of the issuers. It is less flexible because it is issued under fixed terms, unlike a line of credit which allows borrowing as needed up to a certain limit.

Question 3

A company which foregoes the discount when credit terms are 4/15 net 70 is essentially borrowing money from his supplier for an additional
A)40 days.
B)55 days.
C)70 days.
D)85 days.

Accepted Answer

The answer of A company which foregoes the discount when...

Question 4

A company that foregoes a discount of 1/7 net 30 is essentially borrowing money from the vendor at
A)1%.
B)12.29%.
C)16.03%.
D)52.7%.

Accepted Answer

The answer of A company that foregoes a discount of...

Question 5

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the dollar amount of interest Stoney River will need to pay? Assume a 360 day year.
A)$1,125,000
B)$1,099,688
C)$2,250,000
D)41,074,375

Accepted Answer

The interest on a discounted loan is calculated as: Interest = Principal x Rate x (Days/360). So, Interest = $50,000,000 x 0.045 x (180/360) = $1,125,000.

Question 6

Fibercom Inc.needs $500,000 for one year.If the loan takes the form of a discounted note at a stated rate of 4%,how much will Fibercom actually need to borrow?
A)$480,000
B)$500,000
C)$520,833
D)$520,000

Accepted Answer

Since it is a discounted note, the amount borrowed is less than the required amount. To calculate how much will actually be borrowed, we need to use the formula: Amount Borrowed = Required Amount / (1 - Discount Rate * Time Period)

In this case, the Required Amount is $500,000, the Discount Rate is 4%, and the Time Period is 1 year.

Plugging in the values, we get:

Amount Borrowed = $500,000 / (1 - 0.04 * 1) 
Amount Borrowed = $500,000 / 0.96 
Amount Borrowed = $520,833

Therefore, Fibercom will actually need to borrow $520,833. The answer is C.

Question 7

Which of the following is an advantage of trade credit?
A)Trade credit is conveniently obtained as a normal part of the firm's operations.
B)No formal agreements are generally involved in extending credit.
C)The amount of credit extended expands and contracts with the needs of the firm.
D)All of the above.

Accepted Answer

A) Trade credit is often established through regular business transactions, making it a convenient form of financing for the firm.
B) Trade credit arrangements can be informal, allowing for flexibility in establishing terms and conditions.
C) The amount of credit extended can vary based on the needs of the firm, allowing for greater control over cash flow. All of these advantages make trade credit a desirable form of financing for many businesses.

Question 8

The First Webster Bank requires borrowers to maintain a balance of 10% of the line of credit in a non-interest paying account as compensation for providing the line of credit.If the borrower would not normally have deposits in such an account
A)the amount borrowed will be higher than the amount needed.
B)the APR will be less than the stated rate.
C)the amount borrowed will be lower than the amount needed.
D)neither the amount borrowed nor the APR will be affected by the required balance.

Accepted Answer

The requirement to maintain a balance of 10% of the line of credit in a non-interest paying account means that the borrower will need to borrow more than the actual amount needed. For example, if the borrower wants a line of credit of $10,000, they will need to borrow $11,111 to account for the required balance.

Question 9

The Stant Shoe Company established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $100,000 at an annual rate of 5%.A compensating balance of 10% of the amount borrowed is required.What is the largest amount of money Stant will actually be able to use from the line of credit?
A)$90,909
B)$90,000
C)$111,111
D)$100,000

Accepted Answer

To find the largest amount of money Stant will actually be able to use from the line of credit, we need to subtract the compensating balance (10%) from the maximum amount that can be borrowed ($100,000).

Compensating balance = 10% of $100,000 = $10,000 
Maximum amount that can be borrowed - Compensating balance = $100,000 - $10,000 = $90,000

However, we need to take into account the annual rate of 5%. The interest on the borrowed amount will also need to be paid back. To figure out the actual amount that Stant can use from the line of credit, we use the following formula:

Amount available to borrow = Maximum amount that can be borrowed - Compensating balance / (1 - Interest rate)

Plugging in the values: 
Amount available to borrow = $100,000 - $10,000 / (1 - 0.05) = $90,909

Therefore, the largest amount of money Stant will actually be able to use from the line of credit is $90,909.

Question 10

Which of the following would NOT be considered an unsecured loan?
A)Accrued tax payments
B)Line of credit
C)Transaction loans
D)Factored accounts receivable

Accepted Answer

Factored accounts receivable are considered secured loans because they are backed by the accounts receivable as collateral. In contrast, unsecured loans do not require collateral.

Question 11

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the annual percentage rate (APR)to Stoney River (round to the nearest .1 percent)?
A)2.25%
B)2.36%
C)4.71%
D)4.5%

Accepted Answer

The APR can be calculated by first determining the actual loan amount received after the discount and then annualizing the interest rate. With a 4.5% discount on $50 million, Stoney River receives $50 million - ($50 million * 4.5%) = $47.75 million. The interest paid is $2.25 million ($50 million - $47.75 million). The APR is ($2.25 million / $47.75 million) * (365 / 180) = 4.71%.

Question 12

The cost of trade credit varies with the
A)size of the cash discount.
B)length of time between the end of the discount period and the final due date.
C)length of time between the end of the discount period and when the firm purchased from the supplier.
D)both A and C.

Accepted Answer

The cost of trade credit is based on the length of time between the end of the discount period and the final due date. This is because the longer a company takes to pay its suppliers, the longer it ties up its own cash and the more interest it could potentially have to pay on any loans it takes out to fund its operations. The size of the cash discount offered by the supplier may also affect the cost of trade credit, but it is not the primary factor. The length of time between the end of the discount period and when the firm purchased from the supplier is not a relevant factor.

Question 13

Smith Enterprises has a line of credit with Fidelity National Bank that allows Smith to borrow up to $350,000 at an interest rate of 5%.However,Smith must keep a compensating balance of 10% of any amount borrowed on deposit at Fidelity.Smith does not normally keep a cash balance account with Fidelity.What is the effective annual cost of credit (round to nearest .01 percent)?
A)5.93%
B)5.84%
C)5.64%
D)5.56%

Accepted Answer

The answer of Smith Enterprises has a line of credit...

Question 14

Atlas Tire Irons,Inc.is considering borrowing $5,000 for a 3 month period.The firm will repay the $5,000 principal amount plus $150 in interest.What is the annual percentage rate (APR)rate of interest (use a 360-day year)?
A)3%
B)12%
C)15%
D)18%

Accepted Answer

APR=2*150/5000*360/3=12%

Question 15

Which of the following is an advantage of using commercial paper for short-term credit?
A)The interest rate is usually lower than for equivalent bank loans.
B)It is a readily available source of credit for most firms
C)It is a type of free credit.
D)It can be issued for very small amounts.

Accepted Answer

Commercial paper typically offers lower interest rates compared to equivalent bank loans, making it a cost-effective option for short-term borrowing.

Question 16

Once a cash discount period has passed
A)one should pay immediately.
B)there is no financial incentive to pay before the final due date.
C)one should pay after the final due date.
D)cannot be determined from the information.

Accepted Answer

Once the cash discount period has passed, the discount is no longer available and there is no financial incentive to pay before the final due date. Therefore, one should pay by the final due date, but there is no need to pay immediately.

Question 17

Georgia Peaches Corporation (GPC)has a line of credit with Trust Company Bank that allows GPC to borrow up to $300,000 at an annual interest rate of 5.5%.However,GPC must keep a compensating balance of 20% of any amount borrowed on deposit at the Trust Company Bank.GPC does not normally have a cash balance account with the Trust Company.What is the effective annual cost of credit?
A)6.875%
B)6.975%
C)7.075%
D)7.775%

Accepted Answer

The answer of Georgia Peaches Corporation (GPC)has a line of...

Question 18

The primary advantage that factoring accounts receivable provides is
A)the flexibility it gives to the borrower.
B)that the financial institution bears the risk of collection.
C)the low cost as compared with other sources of short-term financing.
D)that the financial institution services the accounts.

Accepted Answer

Factoring accounts receivable transfers the risk of collection from the borrower to the financial institution. This can be a significant advantage for small businesses that may have difficulty collecting their accounts receivable, as the financial institution has more resources and expertise to pursue collection. It also frees up the borrower's time and resources to focus on other aspects of their business. While factoring may not always be the lowest cost option for short-term financing, it can be relatively cost-effective compared to other types of financing such as merchant cash advances or payday loans. Additionally, factoring companies often provide services such as credit checks and collections, which can further benefit the borrower.

Question 19

What factors should we consider when selecting a source of short-term credit?
A)Effective cost and availability
B)Liquidity and profitability
C)Historical trend analysis and liquidity
D)None of the above

Accepted Answer

When selecting a source of short-term credit, it is important to consider the effective cost of the credit (including interest rates, fees, and any other charges), as well as its availability. These factors can affect the overall cost of borrowing and the convenience of obtaining credit when needed. Liquidity and profitability may also be important considerations for businesses, but they are not directly related to the selection of short-term credit sources. Historical trend analysis can be useful for assessing creditworthiness, but it is not a factor in selecting a specific source of credit.

Question 20

Bank Two extends a $3 million line of credit to Capital Corp.The stated rate of interest is 9.5%.Bank Two requires Capital to maintain compensating balances equal to 10% of the amount of the line.Assuming that Capital would not normally carry any deposits at the bank,what is the effective annual rate of interest on the loan?
A)9.5%
B)10.6%
C)11.6%
D)12.3%

Accepted Answer

Since Bank Two requires Capital to maintain compensating balances equal to 10% of the amount of the line ($3 million), Capital must keep $300,000 in a deposit account at the bank. This reduces the amount of the loan that Capital can actually use to $2,700,000 ($3 million - $300,000).

The interest on the loan is calculated on the full $3 million, so at a stated rate of 9.5% the interest charge would be $285,000 ($3 million x 9.5%).

However, since Capital can only use $2,700,000 of the line, the effective interest rate becomes:

Effective rate = Total interest / amount of funds available to use 
Effective rate = $285,000 / $2,700,000 
Effective rate = 10.6%

Therefore, the effective annual rate of interest on the loan is 10.6%.

Quiz 18: Working Capital Management

The Omega Corp.plans to borrow $10,000 for a 2 months.At maturity,Omega will repay the $10,000 principal plus $100 interest.What is the annual percentage rate (APR) rate of interest on this loan?

Which of the following comparisons between short-term bank loans is correct?

A company which foregoes the discount when credit terms are 4/15 net 70 is essentially borrowing money from his supplier for an additional

A company that foregoes a discount of 1/7 net 30 is essentially borrowing money from the vendor at

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the dollar amount of interest Stoney River will need to pay? Assume a 360 day year.

Fibercom Inc.needs $500,000 for one year.If the loan takes the form of a discounted note at a stated rate of 4%,how much will Fibercom actually need to borrow?

Which of the following is an advantage of trade credit?

The First Webster Bank requires borrowers to maintain a balance of 10% of the line of credit in a non-interest paying account as compensation for providing the line of credit.If the borrower would not normally have deposits in such an account

Which of the following would NOT be considered an unsecured loan?

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank.The bank will charge Stoney River 4.5 % on a discounted basis.What is the annual percentage rate (APR) to Stoney River (round to the nearest .1 percent) ?

The cost of trade credit varies with the

Atlas Tire Irons,Inc.is considering borrowing $5,000 for a 3 month period.The firm will repay the $5,000 principal amount plus $150 in interest.What is the annual percentage rate (APR) rate of interest (use a 360-day year) ?

Which of the following is an advantage of using commercial paper for short-term credit?

Once a cash discount period has passed

The primary advantage that factoring accounts receivable provides is

What factors should we consider when selecting a source of short-term credit?