Question 1

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 made as short-term notes that are frequently rolled over, but if the borrower's financial situation deteriorates, the bank may refuse to renew the loan.

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 is a formal agreement between a firm and a bank that establishes a line of credit that can be accessed as needed by the firm. This means that the firm has a reliable source of funding that it can turn to when needed, reducing the risk of being unable to obtain funds. In contrast, an informal line of credit is not a formal agreement and may not be as reliable or consistent, increasing the risk of being unable to obtain funds.

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 what a line of credit is - it sets a maximum limit on how much credit a bank will extend to a borrower assuming they continue to meet certain financial criteria.

Question 4

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. Commercial bank loans typically appear on balance sheets as notes payable, but the importance of banks goes beyond just the dollar amounts shown on balance sheets because they provide nonspontaneous funds (i.e. funds that cannot be generated internally by firms) to businesses.

Question 5

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 requires the borrower to pay a commitment fee on the unused portion of the credit line as compensation to the lender for making the funds available.

Question 6

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 signed by a borrower at the time of a loan transaction that details the amount borrowed, interest rate, repayment terms, and any other applicable terms and conditions. It serves as proof of the loan agreement between the borrower and the lender.

Question 7

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. An informal line of credit does not create a legal obligation for the bank and is typically based on the lender's trust in the borrower rather than a contractual agreement. A revolving credit agreement, on the other hand, is a contractual agreement between the borrower and lender and creates a legal obligation for the lender to provide funds up to a certain limit. Therefore, a revolving credit agreement is generally considered to be a more reliable source of funds for the borrower.

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

$\begin{array}{lr}
\text { Total commitment } & \$ 9,000,000 \
\text { Fee on unused balance } & 0.50 \% \
\text { Prime rate } & 3.25 \% \
\text { Premium over prime } & 1.50 \% \
\text { Amount borrowed } & \$ 6,000,000
\end{array}$ 
 $\begin{array}{l}
\begin{array} { l } 
\text { Interest rate on borrowed funds = Prime  +  Premium=}\
\text { Cost of used portion = Amount borrowed x Rate =}\
\text { Cost of unused portion: Unused balance x Fee= }\
\text { Total annual cost of loan agreement=}\
\
\text { Alternative solution: }\
\text {Rate per day =4.75 \% / 365=}\
\text {Interest per day =(Rate per day) (Amount borrowed)=}\
\text {Interest per year = (Interest per day)/(365)= }\
\text {Cost of unused portion: Unused balance x Fee= }\
\text {Total annual cost of loan agreement =}\
\end{array}
\begin{array} { l } 
4.75\%\
\$ 285,000 \
\$ 15,000 \
\$ 300,000\
\ \ 
0.0130137 \% \
\$ 781 \
\$ 285,000 \
\$ 15,000 \
\$ 300,000\
\end{array}
\end{array}$

Question 9

Which of the following statements is NOT CORRECT?

Accepted Answer

Commercial paper is typically issued by firms with high credit ratings, not just any firm willing to pay the going interest rate.

Question 10

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 return on equity (ROE) due to lower interest expenses. However, short-term debt needs to be refinanced more frequently, increasing the firm's risk due to potential interest rate fluctuations and refinancing challenges.

Question 11

Which of the following statements is CORRECT?

Accepted Answer

Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.

Quiz 21: Supply Chains and Working Capital Management

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.

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.

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.

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.

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

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 NOT CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?