Deck 12: Short-Term and Medium-Term Finance

Question 1

Lenders require collateral to

A) reduce the risk of default.
B) reduce the losses if the borrower defaults.
C) control the borrowing firm.
D) extend to the borrower an unsecured loan.

Answer 1

B

Question 2

In giving up a cash discount, the amount of the discount that is given up is the interest being paid by the firm to keep its money by delaying payment for a number of days.

Answer 2

True

Question 3

The is the time period that elapses from the point when the firm sells a finished good on account to the point when the receivable is collected.

A) average collection period
B) average age of inventory
C) cash conversion cycle
D) average payment period

Answer 3

A

Question 4

With a floating- rate note, the interest rate on the note changes

A) when bank profits change.
B) when the risk level of the borrower changes.
C) when the prime rate changes.
D) when the demand for loans changes.

Question 5

Short- term self- liquidating loans are intended to

A) recapitalise the firm.
B) finance capital assets.
C) finance merger/acquisition activity.
D) cover seasonal peaks in financing caused by inventory and receivable buildups.

Question 6

is a short- term, unsecured promissory note issued by firms with a high credit standing. These notes are primarily issued by commercial finance companies.

A) A line of credit
B) A self- liquidating loan
C) Commercial paper
D) A revolving line of credit

Question 7

If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should

A) pay on the last day of the discount period.
B) take the discount no matter when the firm actually pays.
C) pay as soon as possible.
D) pay on the last day of the credit period.

Question 8

Which of the following is NOT an advantage of factoring?

A) Creation of a known pattern of cash flows.
B) Accounts receivable immediately turned into cash.
C) Elimination of credit and collection department.
D) The effective interest rate.

Question 9

Accruals and accounts payable are sources of short- term financing.

A) negotiated, unsecured
B) negotiated, secured
C) spontaneous, secured
D) spontaneous, unsecured

Question 10

Which three of the following are the most important factors that determine the terms of trade credit?

A) The product type
B) Tradition within the industry
C) The taxation implications
D) The bargaining strength of the two parties

Question 11

In a revolving credit agreement, the firm pays interest on

A) only the amount actually borrowed.
B) the amount actually borrowed and commitment fees on any unused portion of the loan.
C) the full line of credit.
D) the unused portion of the line of credit.

Question 12

Which three statements relate accurately to finance leasing?

A) They are generally short term arrangements.
B) The finance provider expects to recover the full cost of the equipment plus interest over the period of the lease.
C) They normally include a primary and a secondary period.
D) The lessee usually has no right to cancellation or termination.

Question 13

Which three of the following services are most likely to be provided by factoring companies?

A) Providing finance on the security of trade debts
B) Sales ledger administration
C) Credit insurance
D) Organisation of leasing arrangements

Question 14

A firm has projected sales in May, June, and July of €100, €200, and €300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July

A) cannot be determined with the information provided.
B) are €180.
C) are €200.
D) are €220.

Question 15

Financing that arises from the normal operations of the firm is said to be

A) expected.
B) accrued.
C) payable.
D) spontaneous.

Question 16

Which two of the following statements apply to a hire purchase agreement?

A) There is an option or an automatic right to purchase the goods at the end for a nominal or zero final payment.
B) The rate of repayment is at the discretion of the purchaser.
C) Ownership of the goods rests with the purchaser throughout the lease.
D) It is an agreement to hire goods for a specified period.

Question 17

Most commercial paper has maturities ranging from

A) seven days to 30 days.
B) six months to one year.
C) three days to 270 days.
D) one year to three years.

Question 18

Which three of the following are advantages of hire purchase?

A) It is easy and quick to arrange.
B) It offers fixed- rate finance.
C) Only the lender qualifies for tax relief.
D) It involves a small initial outlay.

Question 19

Which two of the following are benefits of trade credit?

A) It is always less expensive than an overdraft.
B) It is convenient and cheap.
C) The bargaining strength lies with the purchaser.
D) It is available to companies of any size.

Question 20

Which of the following types of lease only commits the lessee to a short- term contract, less than the useful life of the asset?

A) Finance lease
B) Operating lease
C) Fixed lease
D) Ownership lease

Question 21

As the ratio of current assets to total assets increases, the firm's risk increases.

Question 22

A financial lease is often also referred to as a capital lease.

Question 23

Factoring accounts receivable is a relatively inexpensive source of unsecured short- term funds that allows firms to turn accounts receivable immediately into cash.

Question 24

The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.

Question 25

In a financial lease, the lessor must receive more than the asset's purchase price in order to earn its required return. However, in an operating lease, the total payments made by the lessee to the lessor are generally less than the lessor's initial cost of the leased asset.

Question 26

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of the asset might be better off borrowing to purchase it.

Question 27

Factoring accounts receivable is not a form of secured short- term borrowing. It entails the sale of accounts receivable at a discount to obtain needed short- term funds.

Question 28

Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

Question 29

Nonrecourse basis is the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts.

Question 30

A floating inventory lien is a lender's claim on the borrower's general inventory as collateral for a secured loan.