Question 1

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 2

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

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Question 3

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 4

Short-term financing decisions are:
A) less important than long-term financing decisions.
B) more difficult to make than long-term financing decisions.
C) easier to make than long-term financing decisions.
D) none of the above

Accepted Answer

Short-term financing decisions are generally easier to make than long-term financing decisions because they have a shorter time frame and involve smaller amounts of money. Additionally, short-term financing options such as trade credit and bank loans are often readily available and don't require extensive planning or analysis. However, this does not mean that short-term financing decisions are less important than long-term ones as they can have a significant impact on a company's liquidity and financial stability.

Question 5

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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Question 6

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 7

Securitization refers to the process of:
A) bonds are sold to the public at a discount.
B) stocks are issued to raise funds instead of bonds.
C) loans and / or receivables are packaged to create new securities.
D) a portfolio of securities is sold to raise funds to pay debts.

Accepted Answer

Securitization refers to the process of packaging loans and/or receivables such as mortgages, credit card debt, or auto loans, and transforming them into securities that can be sold to investors. These securities are typically backed by the underlying loans or receivables, which allow investors to earn returns based on the performance of the underlying assets. Securitization helps to increase liquidity in the financial markets and can provide a new source of funding for lenders.

Question 8

The two major types of money market instruments available are
A) credit lines and T-Bills.
B) T-bonds and junk bonds.
C) bankers' acceptances and commercial paper.
D) stocks and options.

Accepted Answer

Bankers' acceptances and commercial paper are both common types of money market instruments. Credit lines and T-Bills are not money market instruments exclusively, and T-bonds and junk bonds are not on the money market. Stocks and options are not considered money market instruments at all.

Question 9

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 10

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?
A) 4.02%
B) 4.56%
C) 4.65%
D) 56.57%

Accepted Answer

4.65% 11ea8229_3458_1803_bbd8_8bcf896f4c19_TB1726_00 11ea8229_3458_1804_bbd8_25063d09c4b1_TB1726_00 11ea8229_3458_1805_bbd8_7fe458efac35_TB1726_00 11ea8229_3458_1806_bbd8_95d34c937f64_TB1726_00

Question 11

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 12

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

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Question 13

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

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Question 14

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 15

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 16

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 17

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 18

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 19

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?
A) 4.65%
B) 5.64%
C) 8.90%
D) 23.39%

Accepted Answer

8.90% 11ea8229_3458_3f17_bbd8_ab1443ba5b74_TB1726_00 11ea8229_3458_3f18_bbd8_c7f11d307cca_TB1726_00

Question 20

Explain the difference between a firm's decision to grant customers trade credit and that of a bank's decision whether to extend loans to their customers.In your explanation provide a numerical example.

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