finance data bank

Essay Questions

97. List and describe the three basic types of secured inventory loans. Compare the advantages and disadvantages of these loans.

98. Using two separate graphs, illustrate a flexible and a restrictive short-term financing policy. Place costs on the vertical axis and current assets on the horizontal axis. On each graph, indicate the shortage costs, carrying costs, total costs, and indicate the optimal investment in current assets.

99. Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future. How does this affect a firm's selection of a financing policy for its current assets?

100. Compensating balances are frequently a part of revolving lending arrangements with banks, yet they add to the cost of financing for the borrower. Why, then, would borrowers agree to such terms? What other types of alternative financing are available?

Multiple Choice Questions

101. Details Corp. has a book net worth of $8,150. Long-term debt is $1,650. Net working capital, other than cash, is $2,150. Fixed assets are $2,000. How much cash does the company have?
A. $4,250
B. $4,550
C. $5,150
D. $5,650
E. $6,750

102. The Wake-Up Coffee Company has projected the following quarterly sales amounts for the coming year:



Accounts receivable at the beginning of the year are $200. Wake-Up has a 60-day collection period. What is the amount of the accounts receivable balance at the end of Quarter 3?
A. $375
B. $450
C. $500
D. $600
E. $700

103. Consider the following financial statement information for the Bulldog Icers Corporation:



How long is the cash cycle?
A. 36.6 days
B. 37.2 days
C. 41.0 days
D. 41.4 days
E. 42.8 days

104. Your firm has an average collection period of 42 days. Current practice is to factor all receivables immediately at a 4 percent discount. Assume that default is extremely unlikely. What is the effective cost of borrowing?
A. 28.79 percent
B. 36.20 percent
C. 37.78 percent
D. 40.97 percent
E. 42.58 percent

105. Workout Together has projected the following sales for the coming year:



Sales in the year following this one are projected to be 18 percent greater in each quarter. Assume the firm places orders during each quarter equal to 29 percent of projected sales for the next quarter. How much will the firm pay to its suppliers in Quarter 2 if its accounts payable period is 60 days?
A. $212.67
B. $224.33
C. $241.67
D. $251.33
E. $256.67

106. The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65 percent of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per quarter. No capital expenditures are planned. Sales for the first quarter of the following year are projected at $720. The projected quarterly sales are:



What is the amount of the total disbursements for Quarter 2?
A. $564.27
B. $579.43
C. $582.15
D. $585.30
E. $590.67

107. The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2009:



The accounts receivable balance at the end of the previous quarter was $45,000 ($32,000 of which was uncollected December sales.) What is the amount of the January collections?
A. $112,400.00
B. $112,408.16
C. $115,703.03
D. $122,356.33
E. $125,400.00

108. Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:



The company predicts that 3 percent of its credit sales will never be collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase.

In March 2009, credit sales were $302,400, and credit purchases were $224,640. The April 1 cash balance was $403,200. What is the cash balance at the end of May?
A. $348,887
B. $366,846
C. $414,141
D. $457,777
E. $477,374

109. You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is 0.5 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a non-interest bearing account. Assume your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement?
A. 6.50 percent
B. 6.62 percent
C. 6.81 percent
D. 6.87 percent
E. 6.94 percent

110. A bank offers your firm a revolving credit arrangement for up to $115 million at an interest rate of 2 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans. What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year?
A. 0 percent
B. 5.0 percent
C. 5.2 percent
D. 5.3 percent
E. 5.5 percent

45. The Hobby Shop has a checking account with a ledger balance of $692. The firm has $1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of the disbursement float on this account?
A. $0
B. $217
C. $846
D. $909
E. $1,063

46. On an average day, Plastics Enterprises writes 42 checks with an average amount of $587. These checks clear the bank in an average of 2 days. What is the average amount of the disbursement float?
A. $1,174
B. $5,805
C. $24,654
D. $49,308
E. $73,962

47. On average, your firm receives 62 checks a day from customers. These checks, on average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm disburses 38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days. What is the average amount of the collection float?
A. $2,473.80
B. $3,401.00
C. $3,710.70
D. $5,101.50
E. $6,802.00

48. When Chris balanced her business checkbook, she had an adjusted bank balance of $11,418. She had 2 outstanding deposits worth $879 each and 11 checks outstanding with a total value of $3,648. What is the amount of the collection float on this account?
A. -$1,890
B. $1,758
C. $3,648
D. $5,406
E. $6,012

49. Your company has an available balance of $7,911. A deposit of $2,480 that was made this morning is not yet included in the bank's balance. There are also 4 checks outstanding with a value of $325 each. What is the net float?
A. net collection float of $1,180
B. net collection float of $2,480
C. net float of $6,731
D. net disbursement float of $1,300
E. net disbursement float of $2,480