Chapter 13 Dividend Policy and Internal Financing

51) The Boyles Ceramics, Inc. established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement, Boyles had no deposit with the bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note that was due. Boyles decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance. What is the effective annual cost of credit if the loan is made on a discount basis?

A) 11.94%

B) 11.00%

C) 10.83%

D) 10.57%

52) Crawley, Inc. has a line of credit with HNC Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent. However, Crawley, Inc. must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank. Crawley, Inc. does not normally keep a cash balance account with HNC Bank. What is the effective annual cost of credit?

A) 12.40%

B) 12.83%

C) 14.63%

D) 15.47%

53) DAS, Inc has a line of credit with FBT Bank that allows DAS to borrow up to $400,000 at an annual interest rate of 11 percent. However, DAS must keep a compensating balance of 25 percent of any amount borrowed on deposit at the bank. DAS does not normally have a cash balance account with the bank. What is the effective annual cost of credit?

A) 11.45%

B) 12.59%

C) 14.67%

D) 16.00%

54) Which of the following is an unsecured short-term bank loan made for a specific purpose?

A) mortgage bond

B) line of credit

C) revolving credit agreement

D) transaction loan

55) The Missouri River Pendant Company uses commercial paper to satisfy part of its short-term financing requirements. Next week, it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum. In addition, Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper. What is the effective annual cost of credit to Missouri River?

A) 7.7%

B) 7.5%

C) 7.3%

D) 7.1%

56) The Native Industries, Inc. is going to issue 180-day commercial paper to raise $25 million. It anticipates a discounted interest rate of 13 percent, and dealer placement costs of approximately $60,000. What is the effective annual cost of credit to Native Industries?

A) 13.46%

B) 14.06%

C) 14.45%

D) 15.38%

57) The effective annual cost of not taking advantage of the 1/10, net 60 terms offered by a supplier is

A) 1.50%.

B) 5.37%.

C) 6.69%.

D) 7.27%.

58) A floating lien, chattel mortgage, or terminal warehouse receipt have which of the following in common?

A) They all pledge accounts receivables as security.

B) They have nothing in common.

C) They are all unsecured forms of financing.

D) They all use inventory to secure a loan.

59) The primary advantage that pledging accounts receivable provides is

A) the flexibility it gives to the borrower.

B) that the financial institution bears the risk of collection.

C) the low cost as compared with other sources of short-term financing.

D) that the financial institution services the accounts.

60) The terminal warehouse agreement differs from the field warehouse agreement in that

A) the cost of the terminal warehouse agreement is lower due to the lower degree of risk.

B) the borrower of the field warehouse agreement can sell the collateral without the consent of the lender.

C) the warehouse procedure differs for both agreements.

D) the terminal agreement transports the collateral to a public warehouse.