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Exam 8: Sources of Short-Term Financing

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Question 21

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The Magic Pumpkin Limousine Company wants to purchase a car entertainment system for one of its automobiles. The entertainment system vendor has offered to finance the $2,000 purchase over one year in 12 installments, with a total of $200 in interest to be paid on the loan. Magic Pumpkin's bank has offered to finance the purchase with an installment loan, where $155 in interest will be repaid and payments on the loan must be made quarterly. What are the effective interest rates on these loans? Which loan should they select?

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Question 22

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Commercial bank term loans

A) usually carry fixed interest rates.
B) are very short-term in nature.
C) are offered to superior credit applicants.
D) are very short-term in nature and are offered to superior credit applicants.

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Question 23

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Friedman Roses Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

A cash discount calls for a reduction in price if payment cannot be made within a specified time period.

The effective rate on a $20,000 installment loan with quarterly payments and $2,000 in interest for two years is approximately ______.

One major disadvantage of commercial paper is that if the company's credit quality declines, refinancing existing commercial paper might be impossible to achieve through a new issue of commercial paper.

Myrdal Boots can borrow from its bank at 12% to take a cash discount. The terms of the cash discount are 3/10, net 90. Myrdal Boots should borrow from the bank to take the discount.

Match the following with the items below:

Issuers of commercial paper can be divided into finance paper or direct paper, dealer paper, and asset-backed commercial paper.

If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from

The cost of not taking the discount on trade credit of 2/10, net 30 is approximately ______.

The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30.

Von Hayek's Kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the effective rate of interest?

A compensating balance will be lower in periods of tight money than in periods of credit easing.

A term loan is less risky to the bank, thus they provide a fixed rate to the customer.

The required compensating balance is usually computed as a

In order to finance a shipment of badminton sets, Rujisawa Import-Export is seeking a $700,000 one-year bank loan. The Marine Bank requires that Rujisawa maintain a 25% compensating balance and requires four quarterly payments. The Lincoln Bank requires only a 15% compensating balance, but requires 12 monthly payments. In addition, Lincoln discounts the loan. Both banks state that their interest rate is 8%. a) Which bank has the lowest effective interest rate? (NOTE: Deduct the compensating balances from the principal in determining the effective rate.) b) If Lincoln Bank eliminated its compensating-balance requirement, would your answer change?

Firms can almost always increase the amount of time they take to pay for purchases without incurring problems.

Business Book Publishing needs to borrow $800,000 in order to finance its new inventory. Two banks they were considering offered different annual loan terms: Marine Bank offered a 7% loan with a 15% compensating balance to be paid back in quarterly payments. McLean National Bank offered Business Book Publishing an 8.25% loan to be paid back semi-annually. Which loan terms should Business Book Publishing take?

A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.