Question 1

Which of the following statements regarding lines of credit is false?

Accepted Answer

B) A revolving line of credit is a committed line of credit that involves a solid commitment from the bank for a longer period of time, typically two to three years.

Question 2

Which of the following statements is false?

Accepted Answer

A) The prime rate is the rate banks charge their most creditworthy customers.

Question 3

Which of the following statements is false?

Accepted Answer

A) Like long-term debt, commercial paper is rated by credit rating agencies.

Question 4

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.Luther's bank requires that the firm maintain a compensating balance equal to 5% of the loan amount in a non-interest bearing account and the bank charges a 1% origination fee.Calculate the the effective annual rate EAR for this loan.

Accepted Answer

The answer of Luther Industries is offered a $1 million...

Question 5

Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000.Calculate the effective annual rate that Kinston is paying.

Accepted Answer

The answer of Kinston Industries issued $4,000,000 in commercial paper...

Question 6

A short-term bank loan that is often used until a firm can arrange for long-term financing is called

Accepted Answer

A bridge loan is a short-term loan used to bridge the gap until a company can secure long-term financing, such as a mortgage or a line of credit.

Question 7

Galt Industries has issued four-month commercial paper with a $8 million face value.The firm netted $7,831,000 on the sale.The effect annual rate for this financing is closest to:

Accepted Answer

B) The actual four-month return 11ea7e54_8d04_dc03_ba34_91045f4c19e2_TB1620_11 - 1 = .0021581 or 2.1581% , expressing this as an EAR gives us (1 + .021581)² - 1 = 0.06615 or 6.615%

Question 8

Which of the following statements regarding commercial paper is false?

Accepted Answer

B) With dealer paper, the spread decreases the proceeds that the issuing firm receives, thereby increasing the effective cost of the paper.

Question 9

Wyatt Oil has an issue of commercial paper with a face value of $10,000,000 and a maturity of three months.Wyatt received $9,800,000 when it sold the paper.The effect annual rate for this financing is closest to:

Accepted Answer

D) The actual three-month return 11ea7e54_8d04_b4f2_ba34_5b99acb47e29_TB1620_11 - 1 = .0020408 or 2.0408%, expressing this as an EAR gives us (1 + .020408)⁴ - 1 = 0.084166 or 8.4166%

Question 10

Rearden Metal wants to raise $5 million using six-month commercial paper.The net proceeds to Rearden will be $4,865,000.The effect annual rate for this financing is closest to:

Accepted Answer

A) The actual six-month return 11ea7e54_8d04_b4f1_ba34_5942c743d595_TB1620_11 - 1 = .027749 or 2.7749%, expressing this as an EAR gives us (1 + .027749)² - 1 = 0.056268 or 5.6268%

Question 11

A loan agreement requires that the firm pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called

Accepted Answer

A loan agreement that requires payment of interest and principal in one lump sum at the end of the loan period is called a single, end-of-period-payment loan. This type of loan is also known as a balloon loan.

Question 12

Which of the following statements is false?

Accepted Answer

D) The commitment fee associated with a committed line of credit increases the effective cost of the loan to the firm.

Question 13

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If this loan has an origination fee of 1%,then the effective annual rate (EAR)for this loan is closest to:

Accepted Answer

B) The origination fee is charged on the principal of the loan. The amount of the fee is equal to .01 × $1,000,000 = $10,000, so that the actual proceeds from the loan = $1,000,000 - $10,000 = $990,000. The interest on the loan equals $1,000,000 × 11ea7e54_8d04_40bb_ba34_e9c41c01dccc_TB1620_11 × 4 months = $30,000 The actual four month interest rate is: 11ea7e54_8d04_67cc_ba34_bfec35580d3d_TB1620_11 - 1 = .040404 or 4.04% Expressing this rate as an EAR gives 1.040404^(12/4) - 1 = .126176 or 12.62%

Question 14

Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the month.The effect annual rate on this loan is closest to:

Accepted Answer

A) The quarterly interest rate is 8%/4 = 2%. At the end of the quarter Rearden will owe $4 million x 1.02 = 4,080,000 plus the warehouse fee of $10,000 for a total of $4,090,000. The actual quarterly interest rate paid is 11ea7e54_8d05_2a26_ba34_858fb4db2003_TB1620_11 - 1 = 0.0225 or 2.25% , expressing this as an EAR gives us (1 + .0225)⁴ - 1 = 0.093083 or 9.30835%

Question 15

Hammond Motors is considering using a public warehouse loan as part of its short-term financing.The firm will require a loan of $2 million for three months.Interest on the loan will be 12% (APR,compounded quarterly)to be paid at the end of the quarter.The warehouse charges 1% of the face value of the loan,payable at the beginning of the quarter.The effect annual rate on this loan is closest to:

Accepted Answer

D) The quarterly interest rate is 12%/4 = 3%. At the end of the quarter Hammond need to borrow $2,000,000 x 1.01 = $2,020,000 to cover the warehouse fee and they will owe $2,020,000 million x 1.03 = 2,080,600 at the end of the quarter. The actual quarter interest rate paid is 11ea7e54_8d05_2a27_ba34_f9a6c31b53cf_TB1620_11 - 1 = 0.0403 or 4.03%, expressing this as an EAR gives us (1 + .0403)⁴ - 1 = 0.171209 or 17.121%

Question 16

Which of the following statements is false?

Accepted Answer

D) One of the primary sources of short-term financing, especially for small businesses, is the commercial bank.

Question 17

Use the following information to answer the question(s) below.
Taggart Transcontinental needs a $100,000 loan for the next 30 days. Taggart has three alternatives available:
Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.
Alternative #2: Borrow the money from Bank A, which has offered to lead the firm $100,000 for one month at
an APR of 9%. The bank will require a (no-interest) compensating balance of 10% of the face-value of the loan and will charge a $200 loan origination fee, which means that Taggart must morrow even more than the $100,000 they need.
Alternative #3: Borrow the money from Bank B, which has offered to lend the firm $100,000 for one month at an APR of 12%. The loan has a 1% origination fee.
-Which alternative should Taggart choose?

Accepted Answer

B) Alternative #1 -The interest rate per period is $2/$98 = .020408. If the firm delays payment until the 35th day, it has use of the funds for 30 days beyond the discount period. There are 365/30 = 12.167 30 day periods in one year. Thus, the effective annual cost is (1 + .020408)^12.167 - 1 = .2786 or 27.86% Alternative #2 - Taggart must borrow more than the $100,000 they need because of the loan origination fee and compensating balance. The amount that they will need to borrow is equal to (amount needed + fee) x (1 + compensating balance percentage) = ($100,000 + $200)(1.1) = $110,220 ($10,020 is the compensating balance). The amount that will need to be repaid (with interest) is equal to $110,220(1 + 11ea7e54_8d03_a477_ba34_a3cc013b9be7_TB1620_11 ) = $111,046.65. The actual monthly interest rate paid is 11ea7e54_8d03_cb88_ba34_e7a9482cd8d5_TB1620_11 - 1 = .010267 or 1.0267%. Thus, the effective annual cost is (1 + .010267)¹² - 1 = .1304 or 13.04% Alternative #3 - Taggart must borrow more than the $100,000 they need because of the loan origination fee. The amount that they will need to borrow is equal to the amount needed (1 + fee percentage) = $100,000(1.01) = $101,000. The amount that will need to be repaid (with interest) is equal to $101,000(1 + 11ea7e54_8d03_cb89_ba34_2f3292818512_TB1620_11 = $102,010. The actual monthly interest rate paid is 11ea7e54_8d03_cb8a_ba34_f71ae31beccd_TB1620_11 - 1 = .020100 or 2.01%. Thus, the effective annual cost is (1 + 2.01)¹² - 1 = .2697 or 26.97% Choose alternative #2 since it has the lowest EAR.

Question 18

A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000.The effective annual rate that this firm is paying is closest to:

Accepted Answer

B) 11ea7e54_8d05_0314_ba34_89da20d52eaf_TB1620_11 - 1 = .01833 or 1.833% APR EAR = 1.01833^(12/3) - 1 = .075360 or 7.54%

Question 19

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest bearing account,then the effective annual rate EAR for this loan is closest to:

Accepted Answer

A) The origination fee is charged on the principal of the loan. The amount of the compensating balance is equal to .10 × $1,000,000 = $100,000, so that the actual proceeds from the loan = $1,000,000 - $100,000 = $900,000. The interest on the loan equals $1,000,000 × 11ea7e54_8d04_67cd_ba34_894812f36655_TB1620_11 × 4 months = $30,000 The actual four month interest rate is: 11ea7e54_8d04_67ce_ba34_556d302debb4_TB1620_11 - 1 = .144444 or 14.44% Expressing this rate as an EAR gives 1.14444^(12/4) - 1 = .4989 or 49.89%

Question 20

A a written,legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum,regardless of the financial condition of the firm (unless the firm is bankrupt)as long as the firm satisfies any restrictions in the agreement is called

Accepted Answer

A committed line of credit is a legally binding agreement between a bank and a firm, which obligates the bank to lend any amount up to a maximum limit. The agreement is for a specific period, and the bank can only decline to lend if the firm has violated the terms of the agreement. Therefore, it provides more certainty to the borrower than a bridge loan, single end-of-period-payment loan or a short-term mortgage loan.

Quiz 27: Short-Term Financial Planning

Which of the following statements regarding lines of credit is false?

Which of the following statements is false?

Which of the following statements is false?

Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000.Calculate the effective annual rate that Kinston is paying.

A short-term bank loan that is often used until a firm can arrange for long-term financing is called

Galt Industries has issued four-month commercial paper with a $8 million face value.The firm netted $7,831,000 on the sale.The effect annual rate for this financing is closest to:

Which of the following statements regarding commercial paper is false?

Wyatt Oil has an issue of commercial paper with a face value of $10,000,000 and a maturity of three months.Wyatt received $9,800,000 when it sold the paper.The effect annual rate for this financing is closest to:

Rearden Metal wants to raise $5 million using six-month commercial paper.The net proceeds to Rearden will be $4,865,000.The effect annual rate for this financing is closest to:

A loan agreement requires that the firm pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called

Which of the following statements is false?

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If this loan has an origination fee of 1%,then the effective annual rate (EAR) for this loan is closest to:

Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the month.The effect annual rate on this loan is closest to:

Which of the following statements is false?

A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000.The effective annual rate that this firm is paying is closest to:

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest bearing account,then the effective annual rate EAR for this loan is closest to:

A a written,legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum,regardless of the financial condition of the firm (unless the firm is bankrupt) as long as the firm satisfies any restrictions in the agreement is called