Question 1

Ignoring the time value of money,how much does a firm lose on a $2,000 sale that has a 30% profit margin if the 20% probability of default occurs?

Accepted Answer

Loss = $2,000 - (0.30 × $2,000) = $1,400

Question 2

Bond ratings are an inexpensive source of credit information on publicly traded companies.

Accepted Answer

Bond ratings are provided by credit rating agencies and are publicly available for investors to use as a source of credit information on publicly traded companies. They are relatively inexpensive compared to other sources of credit information and can provide important insight into a company's creditworthiness and financial stability.

Question 3

You are buying goods worth $75,000 from a firm that offers the credit terms of 2/10,net 30.What will be the actual payment if you paid within 10 days?

Accepted Answer

A

Question 4

A firm offered 3/10,net 30 as terms of trade credit on a $1,000 invoice dated January 1.How much must the purchaser offer to pay in full on January 4^th?

Accepted Answer

The terms 3/10, net 30 mean a 3% discount is available if paid within 10 days. Paying on January 4th qualifies for the discount: $1,000 - (3% of $1,000) = $970.00.

Question 5

A firm is considering a one-time sale of $100,000 to a customer.The cost of goods sold for this sale is $90,000.If the probability of the customer paying is 0.8,what is the expected profit from this transaction?

Accepted Answer

The answer of A firm is considering a one-time sale...

Question 6

Commercial drafts are issued by a customer's bank.

Accepted Answer

The answer of Commercial drafts are issued by a customer's...

Question 7

The "five C's of credit" represent a framework for analyzing credit risk.

Accepted Answer

The "five C's of credit" (character, capacity, capital, collateral, conditions) are widely recognized as a framework for evaluating creditworthiness and assessing credit risk.

Question 8

Profits are maximized in a firm when the number of bad accounts is minimized.

Accepted Answer

The answer of Profits are maximized in a firm when...

Question 9

A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.

Accepted Answer

Ignoring the cash discount means the customer chooses not to take advantage of the discount for early payment but will still pay the original invoice amount within the agreed payment period, without additional interest.

Question 10

Ajax predicts that if a customer pays on the first sale,it is assured that it is a reliable customer.As such,it expects that customer to generate a net profit of $350 per year for 12 years.Ajax calculates present value with a 15% rate of return.There is a 90% probability that Ajax will secure a reliable customer.However,if the customer defaults,Ajax will have to incur a loss of $500.Determine the expected benefit if credit is granted.

Accepted Answer

First, we calculate the expected benefit if credit is granted:
Expected Benefit = (Probability of becoming a reliable customer * Net profit per year * Present value factor) - (Probability of defaulting * Loss in case of default)
Expected Benefit = (0.9 * $350 * (1-1/(1+0.15)^12)/0.15) - (0.1 * $500)
Expected Benefit = $1,656.87

The closest option is A, $1,657.

Question 11

Credit analysis is a procedure used to determine the implied cost of trade credit.

Accepted Answer

Credit analysis is a procedure used to evaluate the creditworthiness of potential borrowers, not to determine the implied cost of trade credit.

Question 12

A higher score in a typical questionnaire for credit scoring analysis indicates a higher creditworthiness.

Accepted Answer

This statement is true. A higher score indicates a lower risk of default, and therefore, a higher creditworthiness.

Question 13

An aging schedule is a statement sent to customers who are behind in payments.

Accepted Answer

The answer of An aging schedule is a statement sent...

Question 14

The break-even probability of collection is positively related to the firm's percentage of profit margin.

Accepted Answer

The answer of The break-even probability of collection is positively...

Question 15

Extending trade credit can increase the probability of repeat orders.

Accepted Answer

By extending trade credit, a business is giving their customer more time to pay for their order, which can increase the likelihood of the customer placing repeat orders in the future. This can help build a strong, long-lasting relationship between the two businesses.

Question 16

Since defaults can be costly,it is cost effective to undertake a full credit analysis of all customers.

Accepted Answer

The answer of Since defaults can be costly,it is cost...

Question 17

Progress payments allow the customers to choose the payment schedule.

Accepted Answer

Progress payments are typically determined by the contract terms or milestones, not chosen by the customers.

Question 18

Xian Corporation predicts that if a customer pays on the first sale,it is assured that it is a reliable customer.As such,it expects that customer to generate a net profit of $700 per year for 10 years.Ajax calculates present value with a 9% rate of return.There is a 70% probability that Ajax will secure a reliable customer.However,if the customer defaults,Ajax will have to incur a loss of $800.Determine the expected benefit if credit is granted.

Accepted Answer

The expected benefit can be calculated as the product of the probability of securing a reliable customer and the expected net profit from that customer, minus the product of the probability of default and the loss incurred in that case.
Expected benefit = (0.70 x $700 x 7.360) - (0.30 x $800) = $2,904
Therefore, the best choice is B.

Question 19

The potential benefits of additional credit analysis should always be weighed against the incremental costs.

Accepted Answer

It is essential to consider the costs of any additional credit analysis against the potential benefits it may bring. This is to ensure that the investment is justified and that the benefits outweigh the costs.

Question 20

The more liberal the terms of the collection policy,the less the potential for bad debts and unprofitable sales.

Accepted Answer

The more liberal the terms of the collection policy (e.g. longer payment periods, lower credit requirements), the greater the potential for bad debts and unprofitable sales.

Quiz 22: Credit Management and Collection