Deck 30: Working Capital Management

Question 1

Which of the following transactions involve credit? I) COD
II) 2/30, net 60
III) 2/10 EOM, net 60
IV) CBD

A) I only
B) I and IV only
C) IV only
D) II and III only

Answer 1

II and III only

Question 2

Which of the following trade credit terms is not valid?

A) 3/10, net 50
B) 8/10 EOM, net 60
C) 2/10, net 30
D) All of the above are valid credit terms

Answer 2

All of the above are valid credit terms

Question 3

Accounts receivables include:
I. Trade credit
II. Consumer credit
III. Inventories

A) I only
B) II only
C) III only
D) I and II only

Answer 3

I and II only

Question 4

High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal carrying costs.

A) $200,000
B) $100,000
C) $50,000
D) none of the above

Question 5

High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the total costs of optimal inventory.

A) $200,000
B) $100,000
C) $50,000
D) none of the above

Question 6

High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the economic order quantity per order.

A) 1,000 tons
B) 2,000 tons
C) 3,000 tons
D) none of the above

Question 7

High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal number of orders per year.

A) 400
B) 100
C) 200
D) none of the above

Question 8

The costs of holding inventory are:
I. carrying cost
II. order cost
III. pilferage cost

A) I only
B) I and II only
C) III only
D) I and III only

Question 9

When credit is offered with only the invoice as a formal instrument of credit, the credit procedure is called an:

A) Invoice account
B) Open account
C) Unsecured account
D) Unsecured note

Question 10

Suppose you purchase goods on terms of 3/10, net 60. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

A) 32%
B) 5%
C) 91%
D) 28.2%

Question 11

The economic order quantity (EOQ) is calculated using:

A) Q = √[(2 × sales × cost per order)/(carrying cost)]
B) Q = √[(2 × sales × carrying cost)/(cost per order)]
C) Q = √(2 × sales × cost per order × carrying cost)
D) none of the above

Question 12

In the EOQ inventory model, the optimal order size is achieved when:

A) carrying costs > order costs
B) carrying costs < order costs
C) carrying costs = order costs
D) none of the above

Question 13

When credit is granted to another firm this gives rise to a(n):
I. Accounts receivable
II. COD
III. CBD

A) I only
B) II only
C) III only
D) II and III only

Question 14

Suppose you purchase goods on terms of 2/10, net 50. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

A) 2%
B) 20.2%
C) 10.2%
D) 18.6%

Question 15

The following are the types of inventories firms keep:

A) raw material
B) work in process
C) finished goods
D) all of the above

Question 16

The net credit period for a company with terms of 3/10 net 60 is:

A) 50 days
B) 60 days
C) 10 days
D) 57 days

Question 17

High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal annual order costs.

A) $200,000
B) $100,000
C) $50,000
D) none of the above

Question 18

A trade acceptance, when immediate payment is not required, is a:

A) Sight draft
B) Time draft
C) Bill of lading
D) None of the above

Question 19

If a firm grants credit with terms of 3/10 net 30, the creditor:

A) Must pay a penalty of 3% when payment is made in more than 10 days after the sale
B) Must pay a penalty for 10% when payment is made in more than 3 days after the sale
C) Receives a discount of 3% when payment is made in less than 10 days after the sale
D) Receives a discount of 10% when payment is made in less than 3 days after the sale

Question 20

Supposing you purchase goods on terms of 1/10, net 30. Taking compounding into account, what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

A) 9.6%
B) 9.2%
C) 20.1%
D) 44.6%

Question 21

Which of the following statements regarding "bankers' acceptances" is true?
I. Bankers' acceptances are used in overseas trading
II. Bankers' acceptances are bought and sold on a discount basis
III. Bankers' acceptances are guaranteed by the bank

A) I only
B) II only
C) III only
D) I, II, and III

Question 22

Which of the following statements is true?
I. New companies must be prepared to incur more bad debts than established businesses as part of the cost of building up a good customers list
II. Generally, repeat orders are profitable
III. Companies with high profit margins need to be particularly careful about extending credit to high-risk customers

A) I only
B) II only
C) III only
D) I and II only

Question 23

Which of the following countries is the heaviest user of checks:

A) USA
B) UK
C) France
D) Canada

Question 24

A customer has ordered goods with a value of $2000. The production cost is $1800. Under what conditions should you extend credit if there is no possibility of repeat orders?

A) If the probability of payment exceeds 0.67
B) If the probability of payment exceeds 0.75
C) If the probability of payment exceeds 0.80
D) If the probability of payment exceeds 0.90 p(2000 - 1800) - (1 - p)(1800) = 0; p = 0.90

Question 25

Determining the appropriate target cash balance involves assessing the trade-off between:

A) Income and diversification
B) The benefit and cost of liquidity
C) Balance sheet strength and transaction needs
D) All of the above

Question 26

Tom's Toys is currently experiencing a bad debt ratio of 6%. Tom is convinced that, with tighter credit controls, he can reduce this ratio to 2%; however, he expects sales to drop by 8% as a result. The cost of goods sold is 75% of the selling price. Per $100 of current sales, what
Is Tom's expected profit under the proposed credit standards?

A) $15.2
B) $23.0
C) $19.0
D) $21.2

Question 27

Factoring refers to:

A) Determining the aging schedule of the firm's accounts receivable
B) The sale of a firm's accounts receivable to another firm
C) The determination of the average collection period
D) Scoring a customer based on the 5 C's of credit

Question 28

The default rate of Demurrage Associates' new customers has been running at 10%. The average sale for each new customer amounts to $800, generating a profit of $100 and a 40% chance of a repeat order next year. The default rate on repeat orders is only 2%. If the interest rate is 9%, what is the expected profit from each new customer?

A) $88.70
B) $47.75
C) $43.25
D) $50.83

Question 29

Terry's Place is currently experiencing a bad debt ratio of 4%. Terry is convinced that, with looser credit controls, this ratio will increase to 8%; however, she expects sales to increase by 10% as a result. The cost of goods sold is 80% of the selling price. Per $100 of current sales, what is Terry's expected profit under the proposed credit standards?

A) $26.0
B) $15.4
C) $13.2
D) $25.6

Question 30

A customer has ordered goods with a value of $1200. The production cost is $800. Under what conditions should you extend credit if there is no possibility of repeat orders?

A) If the probability of payment exceeds 0.67
B) If the probability of payment exceeds 0.75
C) If the probability of payment exceeds 0.80
D) If the probability of payment exceeds 0.90 p(1200 - 800) - (1 - p)(800) = 0; p = 0.67

Question 31

The default rate of Don's new customers has been running at 20%. The average sale for each new customer amounts to $500, generating a profit of $200 and a 30% chance of a repeat order next year. The default rate on repeat orders is only 5%. If the interest rate is 6%, what is the expected profit from each new customer?

A) $152.50
B) $149.53
C) $275.00
D) $100.00

Question 32

Exporters who require guarantee of payment will ask for:

A) Trade acceptances
B) Bankers' acceptances
C) An irrevocable letter of credit
D) None of the above

Question 33

A customer has ordered goods with a value of $800. The production cost is $600. Under what conditions should you extend credit if there is no possibility of repeat orders?

A) If the probability of payment exceeds 0.67
B) If the probability of payment exceeds 0.80
C) If the probability of payment exceeds 0.75
D) If the probability of payment exceeds 0.90

Question 34

In the USA, export business is insured by:

A) Export-Import bank in association with Foreign Credit Insurance Association (FCIA)
B) Citibank
C) SBA
D) none of the above

Question 35

The following are the main methods that firms use to send and receive money electronically:

A) direct payments
B) direct deposits
C) wire transfers
D) all of the above

Question 36

The following are electronic funds transfer systems available in the USA except:

A) Fedwire
B) CHIPS
C) SWIFT
D) ACH

Question 37

In the United States large-value electronic payments are made through:
I. Fedwire
II. ACH
III. CHIPS

A) I only
B) II only
C) III only
D) I and III only

Question 38

A letter of credit is issued by the:

A) Exporter's bank
B) Importer's bank
C) Dun & Bradstreet
D) Government

Question 39

A commercial draft can be
I. Sight draft II) Time draft
III. Overdraft

A) I only
B) II only
C) III only
D) I and II only

Question 40

Companies frequently use information from the following sources when conducting their credit analysis except:
I. Financial statement supplied by the customer
II. Payment history supplied by other firms
III. Payment history supplied by banks

A) I only
B) II only
C) II and III only
D) I, II, and III

Question 41

If the short-term commercial paper rate is 6% and the corporate tax rate is 35%, what yield would a corporation require on an investment in floating-rate preferred stock? Assume the default risk is the same as for commercial paper.

A) 6.0%
B) 39%
C) 9.2%
D) 4.4%

Question 42

The following are advantages of electronic payment systems except:

A) Easy record keeping
B) Marginal cost of transaction is low
C) Float is drastically reduced
D) Initial investment is high

Question 43

The market for short-term investments is called:

A) Capital market
B) Stock market
C) Bond market
D) Money market

Question 44

Firms which receive a large volume of checks use the following to speed up availability of funds:

A) Concentration banking
B) Retail banking
C) Money market deposit account
D) None of the above

Question 45

Which of the following have the most developed secondary market?

A) Treasury Bills
B) Commercial paper
C) Repurchase agreements
D) Bankers' acceptances

Question 46

The discount on a 91-Treasury bill is 5.2%. What is the annually compounded rate of return?

A) 4.8%
B) 5.2%
C) 5.4%
D) None of the above

Question 47

A repurchase agreement occurs when:

A) A company agrees to buy back its commercial paper before maturity
B) A bank depositor agrees, in advance, to re-invest money in a negotiable certificate of deposit
C) An investor buys part of a government security dealer's inventory and simultaneously agrees to sell it back
D) The federal government agrees to buy T-bills

Question 48

The most common cash management technique used to speed up collections is:

A) Wire transfers
B) Lockboxes
C) In house processing
D) SWIFT

Question 49

"Eurodollars" or "international dollars" are:

A) Dollar deposits in banks outside the US
B) Dollars deposited in the US by foreigners
C) Dollars held by foreign governments
D) None of the above

Question 50

In the United States small-value electronic transfers are made through:
I. Fedwire
II. ACH
III. CHIPS

A) I only
B) II only
C) III only
D) I and III only

Question 51

If the short-term commercial paper rate is 10% and the corporate tax rate is 35%, what yield would a corporation require on an investment in floating-rate preferred stock? Assume the default risk is the same as for commercial paper.

A) 15.2%
B) 10.0%
C) 7.3%
D) 6.6%

Question 52

A variable rate demand bond (VRDB):
I. Is a long-term security
II. Has interest payments linked to the level of short-term interest rates
III. May periodically be sold back to the issuer at face value
IV. Is tax-exempt

A) I only
B) I and II only
C) I, II, and III only
D) I, II, III, and IV

Question 53

A large firm may hold substantial cash balances because:

A) These balances are required by the bank in the form of compensating balances
B) The company may have accounts in many different banks
C) The company may have a very decentralized organization
D) All of the above

Question 54

Negotiable CDs are issued by:

A) US Government
B) Federal agencies
C) Banks
D) Corporations

Question 55

Floating-rate preferred stock offers competitive rates of return with traditional money- market instruments but:

A) Is not rated by Moody's or Standard & Poor's
B) Still provides the corporate investor with the tax exclusion on dividend income
C) Has a fixed rate of dividend income
D) Offers a highly competitive trading market

Question 56

The discount on a 91-Treasury bill is 5.65%. What is the annually compounded rate of return?

A) 5.2%
B) 5.9%
C) 5.6%
D) 5.5%

Question 57

The main advantage of using a netting system to settle foreign currency payments is:

A) drastically reduces the number of payments
B) increases the number of payments
C) reduces the number of foreign currencies
D) none of the above

Question 58

Which of the following is a real-time gross settlement system:

A) Fedwire
B) CHIPS
C) ACH
D) all of the above

Question 59

A tax-paying corporation would prefer to invest short-term money in:

A) Preferred stock
B) Floating-rate preferred stock
C) Common stock
D) Long-term bonds
E) None of the above

Question 60

The following are money market instruments except:

A) T-bills
B) Federal agency discount notes
C) Commercial paper
D) Preferred stocks

Question 61

Commercial paper (CP) rate is:

A) always greater than the prime rate
B) always equal to the prime rate
C) always less than the prime rate
D) always less than the T-bill rate

Question 62

Generally, banks lend up to the following amount when firms provide receivables as collateral:

A) 50% of the value of the receivables
B) 60% of the value of the receivables
C) 80% of the value of the receivables
D) 100% of the value of the receivables

Question 63

Commercial paper (CP) issued in the USA has a maximum maturity of nine months, most
CPs are sold with a maturity of

A) sixty days or less
B) thirty days or less
C) ninety days or less
D) one hundred and eighty days or less

Question 64

The most common benchmarks used for pricing long-term bank loans are:

A) LIBOR
B) Federal funds rate
C) Prime rate
D) All of the above

Question 65

Which of the following are Moody's commercial paper (CP) ratings?

A) Aaa; Aa; A; Baa; etc
B) P-1 (Prime-1); P-2; P-3
C) AAA; AA; A; BBB; etc.
D) A-1; A-2; A-3

Question 66

Loan sales can be in the form of:
I. Assignments
II. Participations
III. Securitizations

A) I only
B) II only
C) III only
D) I, II, and III

Question 67

What percent of syndicated loans are subsequently resold? (approximately)

A) 10%
B) 20%
C) 30%
D) none of the above

Question 68

One common arrangement that allows firms to borrow, repay, and re-borrow over a specified period of time as their cash needs vary is called:

A) Bridge loans
B) Term loans
C) Revolving credit
D) none of the above

Question 69

The maturity of most bank loans is:

A) A few months
B) One year
C) Three years
D) None of the above

Question 70

The most common way to finance a temporary cash deficit is the use of:

A) Banker's acceptances
B) Call options
C) Commercial paper
D) Unsecured bank loans

Question 71

The interest rate on a loan is set at "1% over LIBOR." If the LIBOR rate is 5% then the interest rate on the loan is:

A) 5%
B) 4%
C) 6%
D) 7%

Question 72

When banks have to make large loans, they form a group of banks for the purpose of making the loan. The group is called a:

A) Bank holding company
B) Syndicate
C) Golden umbrella
D) Conglomerate

Question 73

Which of the following Moody's rated commercial paper has the least risk?

A) P-1
B) P-2
C) P-3
D) None of the above

Question 74

The most important source of short-term financing is:

A) Stretching payables
B) Issuing bonds
C) Bank loan
D) All of the above

Question 75

Short-term loans that are used for financing temporary increase in inventory are called:

A) Bridge loans
B) Self-liquidating loans
C) Term loans
D) None of the above

Question 76

When inventories are used as collateral, up to what percent of the value of the inventories will banks lend?

A) 50%
B) 75%
C) 80%
D) none of the above

Question 77

Generally, a line of credit is:
I. Less costly than stretching accounts payable
II. Provided by a bank
III. Unsecured bank borrowing

A) I only
B) I and II only
C) II only
D) I, II, and III

Question 78

Credit lines, in addition to charging interest, also charge a fee on the unused loan amount called:

A) commitment fee
B) registration fee
C) underwriting fee
D) none of the above

Question 79

Firms issuing commercial paper use the following as support to the issue:
I. a back-up line of credit which is generally 75% of amount of the issue in the case of a top- tier issuers
II. a back-up line of credit which is generally 100% of amount of the issue in the case of a lower-grade issuers
III. a back-up line of credit which is irrevocable which is 100% of the amount of the issue in the case of low-rated issuers

A) I only
B) I and II only
C) I, II and III
D) none of the above

Question 80

Finance companies raise funds by
I. Attracting deposits
II. Issuing commercial paper
III. Issuing long-term securities

A) I only
B) II only
C) III only
D) II and III only