Deck 26: Management of Short-Term Liabilities

Question 1

The smaller the trade discount, the more expensive is the
trade credit.​

Answer 1

False

Question 2

Only firms with good credit ratings are able to sell commercial paper.​

Answer 2

True

Question 3

Blanket inventory loans are illustrative of secured, short‑term credit.​

Answer 3

True

Question 4

When a commercial bank grants a loan, it may decrease the cost of the loan by requiring an origination fee.​

Question 5

If suppliers want to discourage the use of trade credit, they may shorten the pay period .​

Question 6

Trade credit is cheaper than commercial bank loans.​

Question 7

One reason why firms use trade credit is that it is a spontaneous source of finance.​

Question 8

If goods cost $1,000 and the terms of credit are 2/15, n45, the firm does not have to pay until the 45th day.​

Question 9

Since commercial bank loans are cheaper than trade credit,
few firms use trade credit.

Question 10

A change in the trade discount from 2% to 3% encourages the use of trade credit.​

Question 11

Accounts payable may be used to secure a loan.​

Question 12

Trade credit is primarily used by retailers to finance accounts receivable.​

Question 13

An origination fee reduces the cost of credit.​

Question 14

Trade credit is primarily used by retailers to finance inventory.​

Question 15

It is not wise to use commercial paper or trade credit to finance plant and equipment.​

Question 16

Factoring is selling accounts payable for cash.​

Question 17

Warehouse financing reduces risk to borrowers.​

Question 18

If goods cost $100 and the terms of credit are n30, the firm has 30 free days use of the goods.​

Question 19

Commercial paper is usually secured by inventory.​

Question 20

If a firm has an excellent credit rating, it may use commercial paper as a source of long‑term finance.​

Question 21

Which of the following terms of trade credit is the least expensive?​

A) 2/10, n30​
B) ​3/15, n45
C) ​3/10, n45
D) ​1/10, n45

Question 22

One method to increase the effective cost of a loan is to discount the interest in advance. l> ​

Question 23

Commercial paper is issued by​

A) all firms​
B) ​large firms with excellent credit ratings
C) ​the federal government
D) ​small firms with excellent credit ratings

Question 24

The effective cost of credit depends upon
1) the amount of time the borrower has the use of the funds
2) the stated rate of interest
3) the proceeds the borrower may use​

A)1 and 2​
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 25

Blanket inventory loans are illustrations of unsecured short‑term credit.​

Question 26

The cost of trade credit will decrease if​

A) ​the discount is larger
B) ​the discount is smaller
C) ​the length of time decreases
D) ​the firm increases its inventory

Question 27

The cost of commercial paper (i.e., the interest rate)​

A) increases as the paper's price increases​
B) ​decreases as the paper's price increases
C) ​increases as the paper sells for a premium
D) ​decreases as the paper sells for a discount

Question 28

It is not wise to use a line of credit to finance the acquisition of plant.​

Question 29

Commercial banks offer lines of credit, which​

A) ​are the cheapest sources of long term loans
B) ​permit firms to borrow short term funds only as needed
C) ​are the cheapest sources of short term funds
D) ​are available only to firms

Question 30

Which of the following may not be used to secure a​ short term loan?

A) inventory​
B) ​accounts receivable
C) ​equipment
D) ​retained earnings

Question 31

3/10, n60 implies 1. a 3% discount if paid in 60 days 2. a 3% discount if paid in 10 day 3. payment must be made by the 60th day​

A) 1 and 2​
B) ​1 and 3
C) ​2 and 3
D) ​1, 2, and 3

Question 32

One means by which a commercial bank may increase the effective cost of a loan is to
1) require an origination fee
2) have the loan paid off in one lump at maturity
3) have the loan discounted in advance​

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 33

The prime rate is
1) the rate banks charge their customers
2) the rate banks charge theirbest customers
3) generally less than the rate on Treasury bills
4) generally greater than the rate on Treasury bills​

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 34

A firm cannot sell its accounts receivable at a premium to raise funds.​

Question 35

Commercial paper is primarily sold in small denominations of less than $10,000.​

Question 36

2/10, n30 implies​

A) ​a 10% discount if the bill is paid in 30 days
B) ​a 2% discount if the bill is paid in 30 days
C) ​a 10% discount if the bill is paid in 10 days
D) ​a 2% discount if the bill is paid in 10 days

Question 37

Factoring is selling​

A) accounts payable​
B) ​accounts receivable
C) ​notes payable
D) ​inventory

Question 38

Secured loans imply​

A) ​specific liabilities support the loan
B) ​the firm has excessive debt financing
C) ​the firm is using only long term debt financing
D) ​an asset is pledged to support the loan

Question 39

An origination fee​

A) ​increases the yield on a loan to the bank
B) ​increases the amount of money the firm may borrow
C) ​reduces the cost of a loan to the borrower
D) ​increases the discount on commercial paper

Question 40

To determine the effective cost of a loan, the borrower needs to know​

A) the use of the proceeds​
B) ​the prime rate
C) ​the length (or term) on the loan
D) ​the margin requirement

Question 41

On a compounded basis, which of the following loans is more expensive?​
a. 2/10, n60
b. $1,000 loan at 3.25 percent per quarter (90 days)

Question 42

​A three-month (90-day) piece of commercial paper is purchased for $97,500. What are the simple and compounded yields on this investment? What is the cost to the firm issuing the paper?

Question 43

Generally it is not wise to use​

A) long term debt to finance long term assets​
B) ​short term debt to finance long term assets
C) ​long term debt to finance short term assets
D) ​short term debt to finance short term assets

Question 44

​What is the annual rate of interest if the terms of trade credit are n30?

Question 45

What is the simple annual cost of three‑month $100,000 commercial paper that is sold for $96,400? What is the true compounded rate of interest?​

Question 46

A firm borrows $1,000,000 for a year from a commercial bank. The terms of the loan are 5% annual interest plus a 5% originating fee paid when the loan is granted. What is the annual interest rate? How much does the firm borrow to be certain that it has $1,000,000 to use?​

Question 47

​a. If a firm borrows $10,000,000 from a bank at 12% and pays an origination fee of 10%. What is the rate of interest if the firm borrows the full amount for the entire year?
​
b. If a firm borrows $10,000,000 from a bank at 12%, discounted in advance, what is the rate of interest if the firm borrows the full amount for the entire year?

Question 48

​What is the cost (in percentages) of the following terms of trade credit (a) 2/20, n40, (b) 1/5, n30, and (c) n30?