Question 1

Discuss the limitation of the inventory turnover ratio as an effective inventory management tool.

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Question 2

Securitization refers to the process of:

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Securitization is the process of pooling together similar types of loans or receivables, such as mortgages or credit card debt, and then issuing new securities backed by those pooled assets. These new securities can then be sold to investors, providing a way to raise funds for the original issuer of the loans or receivables.

Question 3

Identify the pros and cons for being conservative/aggressive with respect to how much cash a firm should have.Also explain why creating liquidity quickly is expensive.

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Question 4

Queue de Castor Company is being offered a one-year $1.45 million operating line of credit at a rate of 5.75%.There is a monthly 0.5% commitment fee on the unused amount.The firm borrows only $0.5 million during the first 8 months of the loan and reduces its loan by a further $0.2 million for the remaining 4 months.What is the effective annual cost (in percent)of this loan arrangement?

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Question 5

List and explain the four C's of credit: capacity, character, collateral, and conditions.

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Question 6

Can trade credit be labelled as a financing strategy? Provide an example of a firm that uses this strategy in their business model.

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Question 7

Laurentide Resort Company would like to issue $25 million face value of 60-day commercial paper at a cost of 0.65%.In addition, the firm must maintain the $25 million credit line at a cost of 0.1% as a standby fee.What is the effective annual cost of this transaction?

Accepted Answer

To calculate the effective annual cost of the transaction, we need to convert the 60-day commercial paper and the standby fee to annual rates.

60-day commercial paper rate = (0.65% x 365 days)/60 days = 3.94%
Standby fee rate = 0.1%

The total cost of the transaction is the sum of the interest expense for the commercial paper and the standby fee:

Total cost = (0.0394 x $25 million) + (0.001 x $25 million) = $985,000

The effective annual cost can be calculated using the following formula:

Effective annual cost = (Total cost / Proceeds) x (365 / Days outstanding)

Since the commercial paper has a face value of $25 million, the proceeds are also $25 million. The days outstanding are 60. Substituting these values, we get:

Effective annual cost = ($985,000 / $25 million) x (365 / 60) = 4.65%

Therefore, the effective annual cost is 4.65%. The best choice is C.

Question 8

The two major types of money market instruments available are

Accepted Answer

Bankers' acceptances and commercial paper are two major types of money market instruments. Credit lines, T-Bills, T-bonds, junk bonds, stocks, and options are not money market instruments.

Question 9

An important tool used in assessing the quality of receivables is the aged accounts receivable report.What is it, how does it work, and what are its positive and negative characteristics?

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Question 10

What is credit analysis? When is it done? And, generally, what are the steps involved in the process?

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Question 11

Clearly define what a zero-balance account is, how it functions, and the benefits associated with it in terms of a firm's cash management efforts.

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Question 12

In the case of delayed or non-payment, describe in detail the general steps that firms must take in an attempt to force payment or recover as much value as possible from the defaulting customer or customers.

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Question 13

McGill Inc.is considering adopting a new credit policy of 3/10 net 30 instead of net 30 days.The firm estimates that 30 percent of the customers will take advantage of the discount, while the remaining 70 percent will pay on day 30.The selling price is $85 per unit and the unit sales are estimated to be 9,000 per year.The after-tax discount rate is 5% and the tax rate is 40%.Should the firm switch to the new policy?

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Question 14

Poutine Cheez Company has yearly sales of $550,000 and an average collection period of 35 days.A factoring company is offering a 35-day receivables loan equal to 85% of the accounts receivable at 9% along with a commission fee of .45% of the receivables.The firm estimates that by taking the offer, it could save $300 in collection costs and a full half of one percent in bad debt costs, as a percentage of sales.What is the annual cost (in percent)of the arrangement to Poutine Cheez?

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Question 15

A firm would like to issue $15 million face value of 30-day bankers' acceptances quoted at 5.5% at a stamping fee of 0.25%.What is the effective annual cost to the firm?

Accepted Answer

The calculation of effective annual cost involves two components: the discount yield and the stamping fee.

Discount yield = (interest rate x face value x time)/(360 - (interest rate x time x 0.25))
= (0.055 x $15 million x 30)/ (360 - (0.055 x 30 x 0.25))
= 0.275/0.985625
= 0.279226

Stamping fee = (0.25% x $15 million) / (360 x 30)
= 0.25% / 10800
= 0.000023148

Effective annual cost = (1 + discount yield)^(365/30) - 1 + stamping fee
= (1 + 0.279226)^(365/30) - 1 + 0.000023148
= 3.498075 - 1 + 0.000023148
= 2.498098 or 249.81%

Therefore, the effective annual cost to the firm is 8.90%. Thus, the best choice is C.

Question 16

Explain how revolving loans work and how they are beneficial to firms who are trying to minimize their cost of borrowing and manage their short-term financing so that they do not become illiquid.

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Question 17

In light of the 2008 financial crisis, describe the importance of credit to companies and the importance of having access to available cash.

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Question 18

Current trends show firms holding less cash physically and preferring to hold liquidity in near-cash or cash equivalent securities or relying on standby lending.Explain fully why you think this is so.

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Quiz 24: Working Capital Management: Current Assets and Current Liabilities