Question 1

Montreal Metals issues commercial paper with a face value of $600,000 and a maturity of two months.The firm receives $594,000 when it sells the paper.If the prime rate is 7% APR compounded monthly,how much interest savings did Montreal Metals realize by using commercial paper?

Accepted Answer

The answer of Montreal Metals issues commercial paper with a...

Question 2

Winnipeg Washing Machines wishes to borrow $1.5 million for one month.Using its inventory as collateral,it can obtain a 10% (APR)loan.The lender requires that a warehouse arrangement be used,with a warehouse fee of $8,500,payable at the end of the month.What is the firm's EAR for this loan?

Accepted Answer

The EAR is calculated as (1 + APR/12)^12 - 1 = (1 + 0.1/12)^12 - 1 = 0.182 or 18.2%.

Question 3

Which of the following best describes the agreement in which a lender reviews the credit sales of the borrowing firm and decides which credit accounts it will accept as collateral for the loan?

Accepted Answer

Pledging of accounts receivable is the agreement in which a lender reviews the credit sales of the borrowing firm and decides which credit accounts it will accept as collateral for the loan.

Question 4

Which of the following best describes the agreement where a firm sells receivables to a lender and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period,and where the lender's claim on the borrower's assets in the event of default is limited only to explicitly pledged collateral?

Accepted Answer

The agreement described here is a factoring of accounts receivable without recourse, where the lender assumes all credit risks of the receivables purchased and the borrower is not liable for any defaults. The other options do not match the given description.

Question 5

Which of the following is a financing arrangement in which the lender's claim on the borrower's assets in the event of a default is limited to only explicitly pledged collateral?

Accepted Answer

Without recourse financing means that the lender's claim on the borrower's assets is limited to only explicitly pledged collateral. This means that if the borrower defaults on the loan, the lender can only go after the collateral that was specifically stated in the loan agreement and cannot seek repayment from any other assets of the borrower.

Question 6

The accounts receivable and inventory of a firm typically are used as collateral when issuing short-term secured financing.

Accepted Answer

Accounts receivable and inventory are common forms of collateral for short-term secured financing because they represent assets that can be readily converted into cash if the borrower defaults on the loan.

Question 7

What is a public warehouse arrangement?

Accepted Answer

A public warehouse arrangement involves storing inventory in a warehouse that is owned and operated by a third party that specializes in storing and tracking inventory. The warehouse is available to multiple borrowers at once, making it a "public" warehouse. This allows for efficient use of space and resources, and reduces the need for individual borrowers to invest in their own warehouse facilities.

Question 8

What is the term used for a short-term,unsecured debt sold by a large company to investors?

Accepted Answer

The term used for short-term, unsecured debt sold by large companies to investors is commercial paper.

Question 9

What is the term used for a short-term,unsecured debt sold by a large company to an intermediary,who then resells the debt to investors in return for a fee for his or her services?

Accepted Answer

Dealer paper refers to short-term, unsecured debt sold by a large company to an intermediary (dealer), who then resells the debt to investors, earning a fee for their services.

Question 10

Which of the following types of loans bears the highest interest rate?

Accepted Answer

The answer of Which of the following types of loans...

Question 11

Which of the following best describes the type of loan in which distinguishable inventory items are held in a trust as security for the loan?

Accepted Answer

Floor planning is a type of loan where inventory items, such as vehicles or appliances, are held in trust as collateral for the loan.

Question 12

Which of the following types of loans would be best for an investor who wishes to reduce risk by maintaining the tightest control over inventory?

Accepted Answer

The answer of Which of the following types of loans...

Question 13

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR,using inventory stored in a field warehouse as collateral.The warehouse fee is 0.5%,payable at the beginning of the loan.What is Matt's EAR?

Accepted Answer

The Effective Annual Rate (EAR) can be calculated by considering the interest rate and the additional costs associated with the loan. In this case, the APR is 5.5%, and there's an additional warehouse fee of 0.5%. The EAR formula considering compounding (which in this case, the compounding effect is minimal since fees are upfront and interest is straightforward) and additional costs gives a higher rate than the nominal APR. The correct calculation involves adjusting for the additional costs and the time period of the loan, leading to an EAR higher than the nominal APR, which is closest to 7.24%.

Question 14

Vancouver Ventilation issues commercial paper with a face value of $2 million and a maturity of six months.The firm receives $1,950,000 when it sells the paper.If the prime rate is 7.5% APR compounded quarterly,how much interest savings did Vancouver Ventilation realize by using commercial paper?

Accepted Answer

First, we need to calculate the interest the firm would have to pay if it borrowed the money at the prime rate for six months:
7.5%/4 = 1.875% per quarter
So, the total interest the firm would have to pay is:
$2,000,000 x 1.01875^2 - $2,000,000 = $38,811.25
Now, we need to calculate the interest the firm paid on the commercial paper:
$1,950,000 x 1.01875^2 - $1,950,000 = $15,000
Finally, we can calculate the interest savings:
$38,811.25 - $15,000 = $23,811.25, which is approximately $23,811. Therefore, the correct answer is C.

Question 15

Which of the following best describes the agreement where a firm sells receivables to a lender and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period,with the provision that the lender will receive payment from the borrower if the customers default on their payments?

Accepted Answer

The agreement described in the question is known as factoring of accounts receivable with recourse. In this type of agreement, the lender (or factor) buys the receivables from the firm, but the firm agrees to buy them back if the customers default on their payments. This provides a degree of protection to the lender, as they can seek reimbursement from the borrower if the customers don't pay. Trust receipts, pledging of accounts receivable, and floating liens all refer to different types of security arrangements, none of which fully match the description given in the question. Factoring of accounts receivable without recourse is a similar agreement, but in this case, the factor takes on the risk of non-payment and does not have the option to seek reimbursement from the borrower.

Question 16

A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.

Accepted Answer

A blanket lien covers all assets of the borrower as collateral, while a trust receipt is specific to certain goods being financed. This makes trust receipts riskier for the lender, resulting in higher interest rates.

Question 17

Which of the following best describes the agreement where all of a firm's inventory is used to secure a loan?

Accepted Answer

A floating lien allows the lender to have a security interest in all of a company's inventory, which is essentially a blanket lien on the assets.

Question 18

Sask Seed wishes to borrow $3 million for two months.Using its inventory as collateral,it can obtain a 9% (APR)loan.The lender requires that a warehouse arrangement be used,with a warehouse fee of $9,000,payable at the end of the month.What is the firm's EAR for this loan?

Accepted Answer

The answer of Sask Seed wishes to borrow $3 million...

Question 19

What is a field warehouse arrangement?

Accepted Answer

A field warehouse arrangement is a type of inventory financing where the inventory is stored by a third-party warehouse operator. In this case, the warehouse is set up on the borrower's premises, but the inventory is kept separate from the borrower's main plant. This allows the lender to have greater control over the collateral and reduces the risk of loss or theft.

Question 20

What is the term used for a short-term,unsecured debt sold by a large company to investors without using an intermediary?

Accepted Answer

The answer of What is the term used for a...

Quiz 20: Short-Term Financial Planning