Chapter 13 Dividend Policy and Internal Financing

6) One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

7) If a company offers a cash discount for early payment, this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.

Learning Objective 4

1) Compounding effectively raises the cost of short-term credit.

2) Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APR, or annual percentage rate, calculation?

A) 3.33%

B) 4.00%

C) 10.00%

D) 11.75%

3) Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APY, or annual percentage yield, calculation?

A) 4.33%

B) 10.34%

C) 12.25%

D) 12.46%

4) Your company is able to arrange financing at either a rate of 12.75% annually, or at a rate of 12% compounded monthly. Assuming financing is needed for one year, which rate is the best?

A) 12% compounded monthly, because the annual percentage yield is 12.68%

B) Both rates are effectively the same, so your company should be indifferent between the two.

C) 112.75% annually because the annual percentage yield for 12% compounded monthly is greater than 12.75%.

D) 12.75% annually, because even though the annual percentage yield is higher, interest if paid only once per year at year end.

5) A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate

A) less than 16.33%.

B) less than 15.47%.

C) less than 14.69%.

D) less than 12.00%.

6) Blastdale Corp. is considering borrowing $15,000 for a 60-day period. The firm will repay the $15,000 principal amount plus $200 in interest. What is the effective annual rate of interest? Use a 360-day year.

A) 7.2%

B) 8.0%

C) 8.2%

D) 10.5%

7) Assume that Montana Mining, Inc. borrows $5,000,000 for 120 days. The total interest paid is $150,000. What is the APY, or Effective Annual Rate of interest that Billings pays?

A) 3.00%

B) 9.00%

C) 9.27%

D) 9.77%

8) Idaho Mining, Inc borrows at prime plus 1.5% on its line of credit. The line requires a 15% compensating balance. If prime rate is 9%, what is the nominal APR of the line of credit?

A) 9.0%

B) 6.0%

C) 10.6%

D) 12.4%