Question 1

Farmers Savings Co.agreed to extend Eckert's Orchards $200,000 of unsecured short-term funds,contingent upon the bank having the funds available.This arrangement represents a:

Accepted Answer

A line of credit is an agreement between a borrower and a lender in which the lender agrees to provide a certain amount of funds to the borrower on an as-needed basis, up to a specified limit. In this case, Farmers Savings Co. is agreeing to provide up to $200,000 of unsecured short-term funds to Eckert's Orchards as needed, as long as the bank has the funds available. This is consistent with a line of credit arrangement, which provides flexibility for the borrower to access funds as needed without having to go through a new loan application process each time. A pledge agreement typically involves the borrower pledging assets as collateral in exchange for a loan, while a factoring agreement involves the sale of accounts receivable to a third party. A trade voucher is not a commonly used term in finance or banking.

Question 2

____________ are assets that are often pledged by businesses as collateral for a loan.

Accepted Answer

Accounts receivable are a common form of collateral for business loans because they represent money owed to the business by its customers. This makes them a reliable asset for lenders to use as collateral. While all of the options listed may be used as collateral, accounts receivable are the most common.

Question 3

Which of the following is the most popular way of raising cash among small businesses?

Accepted Answer

The answer of Which of the following is the most...

Question 4

_________ offers financially stable corporations a technique to raise short-term funds by issuing unsecured promissory notes to the general public.

Accepted Answer

Commercial paper is a short-term, unsecured promissory note issued by financially stable corporations to raise funds from the general public. Trade credit is an agreement between two businesses to buy goods or services on credit terms. A line of credit is a flexible loan that allows businesses to borrow up to a certain limit and pay interest only on the amount borrowed. Factoring is a financial transaction where a company sells its accounts receivable to a third party (a factor) at a discount in order to obtain cash.

Question 5

Jackson Plumbing,a medium sized company,wants to guarantee that it can obtain short-term funds to meet unexpected future cash needs.Which of the following strategies would best meet the financing needs of Jackson Plumbing? Financial managers at Jackson Plumbing should:

Accepted Answer

A revolving credit agreement with the firm's commercial bank provides a guaranteed source of short-term funds to meet unexpected future cash needs. This allows Jackson Plumbing to have access to funds as needed without having to issue securities or eliminate credit sales. Commercial paper may be an option, but it involves additional costs and market risk. Requesting an issue of additional shares of common stock also involves additional costs and dilutes ownership for current shareholders. Eliminating credit sales may not be feasible for Jackson Plumbing's business model.

Question 6

Many small businesses rely on factoring as a source of short-term financing because:

Accepted Answer

Small firms often struggle to secure bank loans due to their limited financial history or lack of substantial collateral. Factoring companies can provide short-term financing based on the value of the company's outstanding invoices, rather than their credit or collateral.

Question 7

As the owner of Kingdom's Treasures,Jerry negotiates with suppliers who hope to place their products in his high volume retail gift store.Jerry finances his inventory through the ________ credit offered by suppliers who delay payments for up to 60 days after the merchandise has been delivered to his business.

Accepted Answer

Trade credit is a type of credit extended by suppliers to their customers. It allows the customer to purchase goods or services without paying the supplier upfront. Instead, the supplier allows the customer to pay for the goods or services at a later date, usually within a certain timeframe such as 30, 60, or 90 days. This is a common way for businesses to finance their inventory, as it allows them to manage their cash flow more effectively.

Question 8

Admiral Electric is a widely known,successful manufacturer of industrial motors and related equipment.When Admiral Electric anticipates a need for short-term funds,it offers unsecured promissory notes to investors for 180 days.To obtain short-term financing,Admiral Electric utilizes:

Accepted Answer

Admiral Electric utilizes commercial paper to obtain short-term financing by offering unsecured promissory notes to investors for 180 days.

Question 9

___________ offer short-term secured loans to high-risk borrowers.

Accepted Answer

Commercial finance companies specialize in providing short-term secured loans to high-risk borrowers who may not qualify for traditional bank loans. Reserve banks, credit brokers, and investment bankers do not typically provide this type of lending.

Question 10

Manitoba Supply offers their customers trade credit with terms 2/15 net 30.This implies that:

Accepted Answer

The terms 2/15 net 30 mean that customers can take a 2% discount if they pay within 15 days; otherwise, the full invoice amount is due in 30 days. The annualized cost of not taking the discount is approximately 48%, calculated using the formula for the cost of trade credit.

Question 11

Which of the following is the most commonly used source of short-term financing for businesses?

Accepted Answer

Trade credit is the most commonly used source of short-term financing for businesses. Trade credit is the credit given by suppliers to their customers for the purchase of goods and services. It is usually offered on a short-term basis and can help businesses manage their cash flow. Bank loans, factoring, and borrowing from family and friends are also sources of short-term financing, but they are not used as commonly as trade credit.

Question 12

Category Development,a leader in residential housing,recently negotiated a financing arrangement with TD Bank.The short-term funding agreement guarantees a specified amount of funds would be made available upon Category Development's request.This arrangement represents a:

Accepted Answer

The answer of Category Development,a leader in residential housing,recently negotiated...

Question 13

Sue is starting a personal wellness business.She is uncomfortable with making a loan application to a bank and decides to use her existing credit card for any short-term financial needs.Her dad suggests this is a bad idea because

Accepted Answer

Using a credit card for business financing can result in significantly higher interest rates compared to a traditional bank loan. This can make it difficult to pay off the debt and can negatively impact the business's finances in the long run. It is important to consider all options and potential consequences before making a decision on how to finance a business.

Question 14

Vitale Jewelers obtains needed short-term funds by selling its accounts receivable to the Friendly Finance Company.Friendly Finance usually pays Vitale about 80% of the value of the receivables.Vitale Jewelers utilizes ________ as a means of raising short-term funds.

Accepted Answer

Factoring is the process of selling accounts receivables to a third party (in this case, Friendly Finance Company) for cash, often at a discount. This allows businesses like Vitale Jewelers to obtain the funds they need quickly, without having to wait for their customers to pay their invoices. By selling their receivables at a discount, Vitale is essentially paying a fee for the convenience of accessing funds upfront.

Question 15

Selling accounts receivable to obtain short-term funds is called:

Accepted Answer

Selling accounts receivable to obtain short-term funds is called factoring. Factoring involves selling accounts receivable to a third-party (called a factor) at a discount in exchange for immediate cash. This provides the business with immediate funds to operate or invest, without having to wait for customers to pay. Pledging is the act of offering an asset as collateral for a loan, equity financing involves raising funds by issuing shares of ownership in the business, and debt financing involves borrowing funds with the promise to repay with interest. None of these best describes the act of selling accounts receivable to obtain short-term funds.

Question 16

Since commercial finance companies offer loans to higher risk customers than commercial banks,the interest rates they charge are usually ________ than rates charged by banks.

Accepted Answer

Commercial finance companies cater to high-risk customers who are not eligible for bank loans due to their poor credit scores. Higher risk means that the lender assumes a greater risk of default, and therefore, to compensate for the added risk, the interest rates charged by commercial finance companies are usually higher than those offered by commercial banks.

Question 17

Deltoid Aluminum uses its stock of unsold aluminum products as collateral for short term loans.This arrangement represents:

Accepted Answer

The use of unsold aluminum products as collateral makes it a secured loan, as the lender can seize and sell the collateral in case the borrower defaults on the loan.

Question 18

Which of the following organizations would be most likely to acquire short-term funding by issuing commercial paper?

Accepted Answer

Commercial paper is typically issued by financially stable corporations with high credit ratings. They can use the commercial paper market to obtain short-term funding at a lower cost than traditional bank loans. Small businesses with limited credit history or significant accounts receivable may have more difficulty obtaining commercial paper. Additionally, a company that prefers equity financing would be unlikely to issue commercial paper.

Question 19

To secure financing for a planned expansion,JamesCo Electronics borrowed $400,000 from King Finance.The ________ loan agreement requires that JamesCo Electronics provide the title to their factory as collateral.

Accepted Answer

A secured loan agreement requires the borrower to provide collateral, such as the title to a factory, to secure the loan.

Question 20

The financial manager of Caroline Graphics negotiated a ________ with her bank that allows Caroline to borrow up to $50,000 without collateral.This arrangement eliminates the need to renegotiate the terms of the loan and complete new paper work each time Caroline borrows money.The preapproved loan agreement is contingent upon the bank having the funds available.

Accepted Answer

The financial manager of Caroline Graphics negotiated a line of credit with the bank, which allows borrowing up to a certain limit without collateral. This type of loan agreement is preapproved and eliminates the need to renegotiate terms and complete new paperwork each time money is borrowed. It is contingent upon the bank having the funds available.

Quiz 17: Financial Management