Question 1

A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Accepted Answer

The statement is true. When a firm enters into a revolving credit agreement, it typically pays a commitment fee on the unused portion of the credit line in order to compensate the bank for the promise to provide those funds if needed.

Question 2

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A revolving credit agreement provides a more formal and structured way for a firm to obtain funds from a bank, reducing the risk of being unable to access necessary funds compared to a less formal and uncertain line of credit.

Question 3

Which of the following statements is NOT CORRECT?

Accepted Answer

Changing the credit policy from 2/10 net 30 to net 60 would actually decrease cash flow from operations in the short term, as it would delay receivables collection. Therefore, statement C is not correct.

Question 4

A lockbox plan is most beneficial to firms that

Accepted Answer

A lockbox plan is most beneficial for firms that have customers spread out over various parts of the country. This system helps in reducing the time it takes for a company to receive payments and access funds by having customers send their payments to a nearby post office box, rather than directly to the company. This is particularly useful for companies with a wide geographic distribution of customers, as it speeds up the collection process and improves cash flow.

Question 5

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Accepted Answer

This statement accurately describes a line of credit.

Question 6

On average, a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

Accepted Answer

The answer of On average, a firm collects checks totaling...

Question 7

Which of the following statements is NOT CORRECT?

Accepted Answer

Commercial paper is a short-term unsecured debt instrument issued by corporations with high credit ratings. Not every firm can issue commercial paper; it is typically limited to financially stable and highly rated companies because investors need assurance that the issuing company is likely to repay the debt.

Question 8

Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a group of banks.The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment.On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 3.25% during the year.If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

Accepted Answer

The answer of Sanders Enterprises arranged a revolving credit agreement...

Question 9

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 10

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Accepted Answer

Loans from commercial banks do appear on balance sheets as notes payable, and banks provide nonspontaneous funds to firms in the form of loans, credit lines, and other financial services beyond just deposit accounts. Therefore, a bank's importance is actually greater than what may be shown on balance sheets.

Question 11

Which of the following statements is CORRECT?

Accepted Answer

Commercial paper is indeed a short-term financing tool that is primarily utilized by large, financially stable companies. It is an unsecured form of promissory note that pays a fixed rate of interest and is issued for the financing of accounts receivable, inventories, and meeting short-term liabilities. Options B, C, D, and E contain inaccuracies regarding the nature of short-term debt, the accessibility of commercial paper, its typical maturity, and the availability of trade credit, respectively.

Question 12

A lockbox plan is

Accepted Answer

A lockbox plan is used to speed up the collection of checks received. It involves setting up a post office box to which customers can send payments. The payments are then collected and processed by a bank, which deposits the funds directly into the company's account. This helps to speed up the collection process and can improve cash flow for the company.

Question 13

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Accepted Answer

The statement is incorrect as both an informal line of credit and a revolving credit agreement create legal obligations for the bank. However, a revolving credit agreement may be a more reliable source of funds as it typically has higher credit limits and longer repayment terms compared to an informal line of credit.

Question 14

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature.However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accepted Answer

Most bank loans to businesses are short-term, often made as 90-day notes which are rolled over. However, if the borrower's financial situation worsens, the bank may refuse to renew the loan.

Question 15

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Accepted Answer

Synchronization of cash flows means aligning the inflows and outflows of cash to reduce the need for a high cash balance. By doing this, a firm can maximize its profitability by investing or using its excess cash instead of keeping it idle in the form of high cash balances. Therefore, proper synchronization of cash flows is an important cash management technique that can increase a firm's profitability.

Question 16

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Accepted Answer

If the yield curve is upward sloping, it means that longer-term interest rates are higher than shorter-term rates. Holding long-term securities would increase the interest rate risk as the longer-term rates are more sensitive to changes in market interest rates. By holding short-term securities, the firm can minimize the interest rate risk because they will not be affected significantly by changes in market interest rates.

Question 17

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Accepted Answer

The answer of Carter & Carter is considering setting up...

Question 18

A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.

Accepted Answer

A promissory note is a legal document that outlines the terms of a loan agreement, including the amount borrowed, interest rate, payment schedule, and any collateral required. It is signed by both the borrower and the lender at the time the loan is executed.

Quiz 17: Supply Chains and Working Capital Management

A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Which of the following statements is NOT CORRECT?

A lockbox plan is most beneficial to firms that

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Which of the following statements is CORRECT?

A lockbox plan is

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature.However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.