Question 1

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 and conditions of a loan agreement, including repayment terms, interest rates, and consequences for defaulting on the loan. It is signed by the borrower and lender at the time of loan execution.

Question 2

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

A revolving credit agreement typically involves a commitment fee charged by the bank on the unused balance of the funds that are available for the borrower.

Question 3

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 4

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

An informal line of credit does not create a legal obligation for the bank, and therefore may be less reliable than a revolving credit agreement.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

Short-term debt typically has lower interest rates than long-term debt, which can lead to a higher ROE. However, it also increases risk due to the need for frequent refinancing and potential interest rate fluctuations.

Question 6

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

This statement is true. Loans from commercial banks are recorded on balance sheets as notes payable, but banks also provide nonspontaneous funds (such as lines of credit and overdraft protection) that are not reflected on balance sheets but are still important sources of funding for many firms.

Question 7

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. This is because it is an unsecured form of borrowing, and only firms with a high credit rating can afford to issue it at competitive rates.

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

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 with a bank provides a formal agreement and commitment to provide funds when needed, which reduces the risk of a firm being unable to obtain funds. An informal line of credit may not offer this level of guarantee, increasing the risk to the firm.

Question 10

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

Bank loans to businesses are often short-term and rolled over rather than repaid when they mature, but if the borrower's financial situation worsens the bank may refuse to renew the loan.

Question 11

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 reputable companies because investors need assurance that the issuing company is a good credit risk.

Quiz 16: Supply Chains and Working Capital Management

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

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.

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.

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.

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?

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.

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.

Which of the following statements is NOT CORRECT?