Question 1

A firm has a committed line of credit with a maximum of $10 million and an interest rate of 8.5% (EAR) with a certain bank. The commitment fee is 0.5% (EAR). The firm borrows $2 million at the start of the year and then repays it at the end of the year. What is the total cost of the loan?

Accepted Answer

C) Interest on borrowed funds = 0.085 × (2,000,000) = $170,000
Commitment fee paid on unused portion = 0.005 × (8,000,000) = $40,000
Total cost of loan = $210,000

Question 2

A petroleum exploration company takes a short-term bank loan in order to finance the purchase of several truck-mounted, vibroseis shakers, which have unexpectedly come onto the market at a good price. Once the purchase is made, the company will obtain long-term financing. Which of the following best describes the short-term loan the company has taken?

Accepted Answer

A bridge loan is a short-term loan taken out by a company to bridge the gap between the immediate need for financing and the long-term financing that will become available in the near future. This type of loan is commonly used in situations like the one described in the scenario, where a company needs quick financing to take advantage of a time-sensitive opportunity.

Question 3

The prime rate is the rate banks charge all but their largest customers, who can negotiate a sub-prime rate.

Accepted Answer

The prime rate is the interest rate that commercial banks charge their most creditworthy customers, typically large corporations. There is no negotiation for a sub-prime rate; rather, sub-prime rates refer to the interest rates charged to borrowers with less favorable credit histories, which are higher than prime rates.

Question 4

Which of the following bank loan arrangements is typically accompanied by a requirement that the firm maintain a minimum level of deposits with the lending bank and restricts the level of the borrowing firm's working capital?

Accepted Answer

A committed line of credit is typically accompanied by requirements such as maintaining a minimum level of deposits with the lending bank and restricting the level of the borrowing firm's working capital in order to ensure that the borrower is managing its funds appropriately. A single, end-of-period payment loan and a bridge loan do not typically have these requirements, while an uncommitted line of credit does not require the borrower to borrow at all.

Question 5

Use the table for the question(s) below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):
 
-The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to ________.

Accepted Answer

A)
 11ea84dc_f4e2_898a_9a63_d75f16a1d5f4_TB1316_00_TB1316_00 Working capital = Cash + AR + inventory - AP
Permanent working capital equals the minimum level of working capital required in four quarters.
So, permanent working capital = $765 million.
Temporary working capital = working capital - permanent working capital
= $765 - $765 = $0 million

Question 6

In a single, end-of-period payment loan, firms ________.

Accepted Answer

In a single, end-of-period payment loan, firms pay interest on the loan and pay back the principal in one lump sum at the end of the loan. This is because the interest accrues over the entire duration of the loan and is due along with the principal at the end of the loan period. Option A is incorrect because it suggests that no interest is paid at all, which is not the case. Option B is also incorrect because it suggests that the principal is paid back with no interest, which is not how loans typically work. Option C suggests that the principal is paid back at the beginning of the loan, which is again not how loans are typically structured.

Question 7

Gemini Real Estate is offered a $2 million line of credit for four months at an APR of 9%. This loan has a loan origination fee of 1.5%. What is the actual four-month interest rate paid, expressed as an EAR?

Accepted Answer

D) Origination fee = 0.015 × ($2,000,000) = $30,000
Actual amount borrowed = $2,000,000 - $30,000 = $1,970,000
Interest paid = $2,000,000 × (.03) = $2,060,000
four month interest rate = 2,060,000 / 1,970,000 = 1.045685
EAR = 14.34%

Question 8

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

Accepted Answer

This type of loan is commonly referred to as a balloon payment loan, where the borrower pays interest on the loan throughout the term and repays the principal in a single lump sum at the end of the term. This is also known as a single, end-of-period-payment loan.

Question 9

What is permanent working capital?

Accepted Answer

The answer of What is permanent working capital?...

Question 10

Which of the following best describes a bank loan arrangement where a bank agrees to lend a firm any amount up to a stated maximum in an informal agreement which does not legally bind the bank to provide the funds?

Accepted Answer

An uncommitted line of credit is a type of bank loan arrangement where a bank agrees to lend a firm any amount up to a stated maximum in an informal agreement which does not legally bind the bank to provide the funds. On the other hand, a committed line of credit is a formal agreement where a bank commits to lend a firm up to a specified amount over a set period, usually up to a year.

Question 11

A firm has a committed line of credit with a maximum of $1.2 million and an interest rate of 12% (EAR) with a certain bank. The commitment fee is 0.6% (EAR). The firm borrows $500,000 at the start of the year and then repays it at the end of the year. What is the total cost of the loan?

Accepted Answer

B) Interest on borrowed funds = 0.12 × (500,000) = $60,000
Commitment fee paid on unused portion = 0.006 × (700,000) = $4,200
Total cost of loan = $64,200

Question 12

Jim's Electrical is offered a $400,000 line of credit for six months at an APR of 9%. The bank requires that the firm keep an amount equal to 5% of the loan principal in a non-interest-earning account with the bank as long as the loan remains outstanding. What is the actual six-month interest rate paid, expressed as an EAR?

Accepted Answer

C) Compensating balance = 0.05 × 400,000 = $20,000 Actual loan amount = $400,000 - $20,000 = $380,000 Total amount payable = $400,000 × (1 + 0.09 / 2) = $418,000 Amount owed = $418,000 - $20,000 = $398,000 Actual interest rate paid = 398,000 / 380,000 = 1.04737 Expressing as EAR = (1.04737² - 1) = 9.70%

Question 13

What is temporary working capital?

Accepted Answer

The answer of What is temporary working capital?...

Question 14

Conways Roofing Services is offered a $1 million line of credit for three months at an APR of 8%. The bank requires that the firm keep an amount equal to 12% of the loan principal in a non-interest-earning account with the bank as long as the loan remains outstanding. What is the actual three-month interest rate paid, expressed as an EAR?

Accepted Answer

A) Compensating balance = 0.12 × 1,000,000 = $120,000 Actual amount borrowed = $1,000,000 - $120,000 = $880,000 Total amount payable = $1,000,000 × (1 + 0.08 / 4) = $1,020,000 Amount owed = $1,020,000 - $120,000 = $900,000 Actual interest rate paid = 900,000/880,000 = 1.02273 Expressing as EAR = (1.02273⁴ - 1) = 9.41%

Question 15

A firm has a committed line of credit with a maximum of $2.5 million and an interest rate of 9% (EAR) with a certain bank. The commitment fee is 0.65% (EAR). The firm borrows $2 million at the start of the year, and then repays it at the end of the year. What is the total cost of the loan?

Accepted Answer

B) Interest on borrowed funds = 0.09 × ($2,000,000) = $180,000
Commitment fee paid on unused portion = 0.0065 × ($500,000) = $3,250
Total cost of loan = ($180,000 + $3,250) = $183,250

Question 16

Which of the following is a committed line of credit with no fixed maturity?

Accepted Answer

Evergreen credit is a type of committed line of credit that has no fixed maturity. It is typically used by businesses to finance their ongoing operations and can be used repeatedly as long as the borrower continues to meet the lender's creditworthiness criteria. Choice A (bridge loan) is a short-term loan used to bridge the gap between two longer-term financing arrangements. Choice C (promissory note) is a written promise by a borrower to pay a specified sum of money to a lender at a future date or on demand. Choice D (blanket lien) is a type of security interest that gives a creditor the right to take possession of all of a debtor's assets in the event of default. None of these choices fit the description of a committed line of credit with no fixed maturity.

Question 17

Crimini Foods is offered a $400,000 line of credit for six months at an APR of 10%. This loan has a loan origination fee of 2%. What is the actual six-month interest rate paid, expressed as an EAR?

Accepted Answer

D) Origination fee = 0.02 × ($400,000) = $8000 Loan amount = $400,000 - $8000 = $392,000 Interest paid = $20,000 Semiannual interest rate = $420,000 / $392,000 = 1.0714 EAR = (1.0714² - 1) = 14.80%

Question 18

Stuart Mining is offered a $4,000,000 line of credit for three months at an APR of 6%. The bank requires that the firm keep an amount equal to 10% of the loan principal in an account with the bank as long as the loan remains outstanding. This account pays 2% APR with quarterly compounding. What is the actual three-month interest paid on this loan?

Accepted Answer

B) Compensating balance = 0.1 × $4,000,000 = $400,000
Actual loan amount = $4,000,000 - $400,000 = $3,600,000
Amount earned on the compensating balance = $400,000 × (1 + 0.02 / 4) = $402,000
Total amount payable = $4,000,000 × (1 + 0.06 / 4) = $4,060,000
Amount owed = $4,060,000 - $402,000 = $3,658,000
Actual interest rate paid = $3,658,000 / $3,600,000 = 1.01611
Expressing as EAR = 6.60%

Question 19

Use the table for the question(s) below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):
 
-The temporary working capital needs for Hasbeen Toys in quarter 3 is closest to ________.

Accepted Answer

D)
 11ea84dc_f4e2_d7ab_9a63_53512e72f848_TB1316_00_TB1316_00 Working capital = Cash + AR + inventory - AP
Permanent working capital equals the minimum level of working capital which occurs at quarter 1 in the amount of $765 million.
Temporary working capital = working capital - permanent working capital
= $1105 - $765 = $340 million

Question 20

An uncommitted line of credit is obtained through a nonbinding, informal agreement.

Accepted Answer

An uncommitted line of credit is not secured by collateral and is obtained through an informal agreement between the borrower and lender. It is nonbinding and revocable by the lender at any time.

Quiz 20: Short-Term Financial Planning

A firm has a committed line of credit with a maximum of $10 million and an interest rate of 8.5% (EAR) with a certain bank. The commitment fee is 0.5% (EAR) . The firm borrows $2 million at the start of the year and then repays it at the end of the year. What is the total cost of the loan?