Chapter 13 Dividend Policy and Internal Financing

31) Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What will be the annual percentage rate, or APR, for this financing?

A) 10.00%

B) 12.12%

C) 10.67%

D) 13.33%

32) Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What is the annual percentage rate for this financing assuming discounted interest?

A) 14.29%

B) 12.98%

C) 11.67%

D) 10.53%

33) All of the following are potential advantages of commercial paper EXCEPT

A) flexible repayment terms.

B) lower interest rates than comparable sources of short-term financing.

C) no compensating balance requirements.

D) ability to borrow very large amounts.

34) Marley Financial plans to sell $50,000,000 of 120-day commercial paper, on which it expects to pay discounted interest at a rate of 5% per year. Dealer fees are expected to be $30,000. The effective cost of credit to Marley Financial is

A) 5.27%.

B) 5.64%.

C) 6.22%.

D) 7.53%.

35) Which of the following sources of short-term financing is likely to have the lowest interest rate?

A) accounts receivable loan (pledging of accounts receivable)

B) line of credit

C) line of credit with a compensating balance

D) commercial paper

36) Hyper Retail Outlets sell goods on terms of net 40. The store's average monthly sales (all on credit) are $70,000. Hyper pledges all of its receivables to the bank, which advances 80% of the face value of the receivables at a rate of 2.5% above prime. The bank also charges a 1% processing fee on all receivables pledged. Hyper borrows the full amount possible, and the current prime rate is 5%. What is the annual percentage rate (APR) of using this source of financing for one full year?

A) 23.5%

B) 22.5%

C) 21.8%

D) 19.1%

37) Which of the following sources of short-term financing is likely to have the highest interest rate?

A) accounts receivable loan (pledging of accounts receivable)

B) line of credit

C) line of credit with a compensating balance

D) commercial paper

38) Which of the following is NOT an advantage of trade credit?

A) The amount of extended credit expands and contracts with the needs of the firm.

B) The cost of forgoing the discount is less than the prime rate.

C) Generally no formal agreements are involved in the extension of trade credit.

D) Trade credit is very flexible.

39) Which of the following statements regarding a line of credit is true?

A) The purpose for which the money is being borrowed must be stated by the borrower.

B) A line of credit agreement usually fixes the interest rate that will be applied to any extensions of credit.

C) A line of credit agreement is a legal commitment on the part of the bank to provide the stated credit.

D) Such agreements usually cover the borrower's fiscal year.

40) Which item would constitute poor collateral for an inventory loan?

A) lumber

B) vegetables

C) grain

D) chemicals