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Exam 15: Current Liabilities Management

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Question 1

Multiple Choice

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Loans on which the interest is paid in advance are often called

A) premium loans.
B) reduced-principle loans.
C) called loans.
D) discount loans.

Correct Answer

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D

Question 2

Multiple Choice

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Financing that matures in one year or less and has specific assets pledged as collateral is called

A) spontaneous financing.
B) unsecured short-term financing.
C) secured short-term financing.
D) none of the above.

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Question 3

Multiple Choice

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Short-term self-liquidating loans are intended to

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill

Short-term loans that businesses obtain from banks and through commercial paper are

Commercial banks lend unsecured short-term funds in the following three basic ways.

Generally as sales increase a company needs more inventory and more employees resulting in

Appropriate collateral for a secured short-term loan is

Aunt Tilly's Feeds, Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000, terms are net 30 days, and payment is made on the average of 30 days. Western National Bank will advance funds under a pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Commodity Finance offers factoring on a nonrecourse basis for a 1 percent factoring commission, charging 1.5 percent per month on advances and requiring a 15 percent factor's reserve. Under this plan, the firm would factor all accounts and close its credit and collections department, saving $10,000 per year. (a) What is the effective interest rate and the average amount of funds available under pledging and under factoring? (b) Which plan do you recommend? Why?

In doing business in foreign countries, financing operations in the local market not only improves the company's business ties to the host community but also minimizes exchange rate risk.

In pledging accounts receivable, the percentage advanced against the adjusted collateral is determined by the borrower based on its overall evaluation of the quality of the acceptable receivables and the expected cost of their liquidation.

Cull Incorporated recently borrowed $250,000 from Century Bank when the prime rate was 4%. The loan was for 90 days with interest to be paid at the end of the period with a rate fixed at 1.5% above the prime rate. What is the total interest paid on this loan and what is the effective annual rate? (Assume a 365 day year.)

If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should

Pledges of accounts receivable are normally made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit these payments as they are received.

A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.

________ involves the sale of accounts receivable.

Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.

Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 4.19 percent.

All of the following goods represent appropriate collateral for a secured loan to a school supply manufacturer EXCEPT

The primary source of secured short-term loans to businesses are