CPA REVIEW SCHOOL OF THE PHILIPPINES Cebu MANAGEMENT ADVISORY SERVICES WORKING CAPITAL FINANCE
THEORY 1. Compar Compared ed to other other firms in the indust industry ry,, a company company that mainta maintains ins a conser conservat vative ive working working capital policy will tend to have a a. Greate Greaterr percent percentage age of shor short-t t-term erm fina financi ncing. ng. b. Greater risk of needing to sell current assets to to repay debt. c. Higher Higher rati ratio o of curren currentt assets assets to to fixed fixed assets assets.. d. Higher Higher total total asset asset turnove turnoverr.
. ! firm firm followi following ng an aggressiv aggressivee working working capital capital strateg strategy y would a. Hold Hold substa substanti ntial al amoun amountt of fixe fixed d assets assets.. b. "inimi#e the amount of short-term borrowing. c. $inance $inance fluctuat fluctuating ing assets assets with long-term long-term financing. financing. d. "inimi#e "inimi#e the amount of funds funds held held in very very li%uid li%uid assets. assets. &. 'he working working capital capital financin financing g policy policy that sub(ects sub(ects the firm firm to the greate greatest st risk of being being unable to meet the firm s maturing obligations is is the policy that finances finances a. $luctu $luctuati ating ng current current asset assetss with longlong-ter term m debt. debt. b. )ermanent current assets with long-term debt. c. )erman )ermanent ent curre current nt assets assets with with shortshort-ter term m debt. debt. d. $luctuatin $luctuating g current current asset assetss with with shortshort-term term debt.
*. +etermining the appropriate level of working capital for a firm re%uires a. valua valuatin ting g the risks risks associ associate ated d with with various various levels levels of fixed assets assets and the types types of debt debt used to finance these assets. b. Changing the capital structure and dividend policy for the firm. c. "ainta "aintaini ining ng short-te short-term rm debt at the lowest lowest possibl possiblee level level because because it is ordina ordinaril rily y more more expensive than long term debt. d. ffsett ffsetting ing the profitabili profitability ty of current assets assets and current current liabilities liabilities against against the probability probability of technical insolvency. insolvency. e. "ainta "aintaini ining ng a high high proportio proportion n of li%uid li%uid assets assets to total total assets assets in order order to maximi maximi#e #e the return on total investments. . /tarrs /tarrs Company Company has curren currentt assets assets of 0&, 0&, and curren currentt liabi liabilit lities ies of 0, 0,.. /tarrs /tarrs could increase its working capital by the !. )repayment of 0, of next year2s rent. 3. 4efinancing of 0, of short-term short-term debt with long-term debt. C. )urchase of 0, of temporary temporary investments for cash. +. Collection of 0, of accounts receivable. 5. ! loc lockk-bo box x syst system em !. 4educes the need for compensating balances. 3. )rovides security security for late night deposits. C. 4educes the risk of having checks lost in the mail. mail. +. !ccelerates the inflow of funds. 6. 7gnori 7gnoring ng cost and other other effects effects on the firm, firm, which of the followi following ng measures measures would would tend to reduce the cash conversion cycle8 a. "aintain "aintain the level level of receiv receivables ables as sales sales decrease. decrease. b. 3uy more raw materials to take advantage of price breaks. c. 'ake discoun discounts ts when when off offere ered. d. d. $orgo $orgo discoun discounts ts that that are curren currentl tly y being taken taken..
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9. :hich of the following is not a ma(or function in cash management8 a. Cash flow control c. "aximi#ing sales b. Cash surplus investment d. btaining financing services ;. ! precautionary motive for holding excess cash is a. 'o enable a company to meet the cash demands from the normal flow of business activity. b. 'o enable a company to avail itself of a special inventory purchase before prices rise to higher levels. c. 'o enable a company to have cash to meet emergencies that may arise periodically. d. 'o avoid having to use the various types of lending arrangements available to cover pro(ected cash deficits. 1. 'he amount of cash that a firm keeps on hand in order to take advantage of any bargain purchases that may arise is referred to as its !. 'ransactions balance. C. )recautionary balance. 3. Compensating balance. +. /peculative balance. 11. !ll of the following are valid reasons for a business to hold cash and marketable securities except to !. /atisfy compensating balance re%uirements. 3. "aintain ade%uate cash needed for transactions. C. "eet future needs. +. arn maximum returns on investment assets. 1. :hich of the following actions would not be consistent with good management8 a. 7ncreased synchroni#ation of cash flows. b. "inimi#e the use of float. c. "aintaining an average cash balance e%ual to that re%uired as a compensating balance or that which minimi#es total cost. d. ?@ formula can be adapted in order for a firm to determine the optimal mix between cash and marketable securities. 'he ? model assumes all of the following except a. 'he cost of a transaction is independent of the dollar amount of the transaction and interest rates are constant over the short run. b. !n opportunity cost is associated with holding cash, beginning with the first dollar. c. 'he total demand for cash is known with certainty. d. Cash flow re%uirements are random. 1. 'he following are desirable in cash management exceptA a. Cash is collected at the earliest time possible. b. "ost sales are on cash basis and receivables are aged current c. )ost-dated checks are not deposited on time upon maturity. d. !ll sales are properly receipted and promptly deposited intact.
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15. 'he one item listed below that would warrant the least amount of consideration in credit and collection policy decisions is the !. ?uality of accounts accepted. C. Cash discount given. 3. ?uantity discount given. +. =evel of collection expenditures. 16. :hich of the following investments is not likely to be a proper investment for temporary idle cash8 a. 7nitial public offering of an established profitable conglomerate. b. Commercial paper. c. 'reasury bills. d. 'reasury bonds due within one year. 19. 'he goal of credit policy is to a. xtend credit to the point where marginal profits e%ual marginal costs. b. "inimi#e bad debt losses. c. "inimi#e collection expenses. d. "aximi#e sales. 1;. 7t is held that the level of accounts receivable that the firm has or holds reflects both the volume of a firm s sales on account and a firm s credit policies. :hich one of the following items is not considered as part of the firm s credit policies8 a. 'he minimum risk group to which credit should be extended. b. 'he extent >in terms of money@ to which a firm will go to collect an account. c. 'he length of time for which credit is extended. d. 'he si#e of the discount that will be offered.
. 7n assessing the loan value of inventory, a banker will normally be concerned about the portion of inventory that is work-in-process because a. :7) inventory is relatively easy to sell because it does not represent a raw material or a finished product. b. :7) inventory usually has the highest loan value of the different inventory types. c. :7) generally has the lowest marketability of the various types of inventories. d. :7) represents a lower investment by a corporation as opposed to other types of inventories. 1. :hen a company analy#es credit applicants and increases the %uality of the accounts re(ected, the company is attempting to !. "aximi#e sales. C. 7ncrease the average collection period. 3. 7ncrease bad-debt losses. +. "aximi#e profits. . ! high turnover of accounts receivable, which implies a very short days-sales outstanding, could indicate that the firm !. Has a relaxed >lenient@ credit policy. 3. ffers small discounts. C. assume the use of the allowance for doubtful accounts method@. b. ! significant sales volume decrease near the end of the accounting period. c. !n increase in cash sales in proportion to credit sales. d. ! change in credit policy to lengthen the period for cash discounts. *. 'he credit and collection policy of !margo Co. provides for the imposition of credit block when the credit line is exceeded andBor the account is past due. +uring the month, because of the campaign to achieve volume targets, the general manager has waived the credit block
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policy in a number of instances involving big volume accounts. 'he likely effect of this move is a. +eterioration of aging of receivables only. b. 7ncrease in the level of receivables only. c. +eterioration of aging and increase in the level of receivables. d. +ecrease in collections during the month the move was done. . !n increase in sales resulting from an increased cash discount for prompt payment would be expected to cause !. !n increase in the operating cycle. 3. !n increase in the average collection period. C. ! decrease in the cash conversion cycle. +. ! decrease in purchase discounts taken. 5. 7f a firm had been extending trade credit on a B1, netB& basis, what change would be expected on the balance sheet of its customer if the firm went to a net cash & policy8 a. 7ncreased payables and increased bank loan. b. 7ncreased receivables. c. +ecreased receivables. d. +ecrease in cash. 6. 'he level of accounts receivable will most likely increase as a. Cash sales increase and number of says sales. b. Credit limits are expanded, credit sales increase, and credit terms remain the same. c. Credit limits are expanded, cash sales increase, and aging of the receivables is improving. d. Cash sales increase, current receivables ratio to past due increases, credit limits remain the same. 9. ! change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction of the investment in accounts receivable, and a reduction in the number of doubtful accounts. 3ased on this information, we know thatA a. et profit has increased. b. 'he average collection period has decreased. c. Gross profit has declined. d. 'he si#e of the discount offered has decreased. ;. ! strict credit and collection policy is in place in /tar Co. !s $inance +irector you are asked to advise on the propriety of relaxing the credit standards in view of stiff competition in the market. Dour advise will be favorable if a. 'he competitor will do the same thing to prevent lost sales. b. there is a decrease in the distribution level of your product, and a more aggressive stance in necessary to retain market share. c. 'he pro(ected margin from increased sales will exceed the cost of carrying the incremental receivables. d. 'he account receivable level is improving, so the company can afford the carrying cost of receivables. &. "erkle, 7nc. has a temporary need for funds. "anagement is trying to decide between not taking discounts from one of their three biggest suppliers, or a 1*.6E per annum renewable discount loan from its bank for & months. 'he suppliers2 terms are as followsA $ort Co. 1B1, net & 4iley "anufacturing Co. B1, net 5 /had, 7nc. &B1, net ;
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&1. ! company obtaining short-term financing with trade credit will pay a higher percentage financing cost, everything else being e%ual, when !. 'he discount percentage is lower. 3. 'he items purchased have a higher price. C. 'he items purchased have a lower price. +. 'he supplier offers a longer discount period. PRO#LEMS 1. nert, 7nc.2s current capital structure is shown below. 'his structure is optimal, and the company wishes to maintain it. +ebt E )referred e%uity E Common e%uity 6E nert2s management is planning to build a 06 million facility that will be financed according to this desired capital structure. Currently, 01 million of cash is available for capital expansion. 'he percentage of the 06 million that will come from a new issue of common shares is !. .E. 3. 5.E. C. 6.E. +. 5.E.
. 3obo ==C2s has an asset base of 01 million. !fter a dividend payment of 0*,, 3obo added 0, to retained earnings. :hat is 3obo2s internal growth rate8 !. 1E 3. *E C. E +. ;E &. 7t is the policy of $ran# Corp. that the current ratio cannot fall below 1. to 1.. 7ts current liabilities are )*, and the present current ratio is to 1. How much is the maximum level of new short-term loans it can secure without violating the policy8 a. )*, b. )&, c. )55,556 d. )9, *. :ildthing !musement Company s total assets fluctuate between 0&, and 0*1,, while its fixed assets remain constant at 05,. 7f the firm follows a maturity matching or moderate working capital financing policy, what is the likely level of its long-term financing8 a. 0 ;, b. 05, d. 0*1, e. 0&,
. Farrett nterprises is considering whether to pursue a restricted or relaxed current asset investment policy. 'he firm s annual sales are 0*, its fixed assets are 01, debt and e%uity are each percent of total assets. 37' is 0&5,, the interest rate on the firm s debt is 1 percent, and the firm s tax rate is * percent. :ith a restricted policy, current assets will be 1 percent of sales.
5. 3ully Corporation purchases raw materials on Fuly 1. 7t converts the raw materials into inventory by /eptember &. However, 3ully pays for the materials on Fuly . n ctober &1, it sells the finished goods inventory. 'hen, the firm collects cash from the sale 1 month later on ovember &. 7f this se%uence accurately represents the average working capital cycle, what is the firm2s cash conversion cycle in days8 !. ; days. 3. 1&& days. C. 1& days. +. 1& days. 6. Fumpdisk Company writes checks averaging 01, a day, and it takes five days for these checks to clear. 'he firm also receives checks in the amount of 016, per day, but the firm loses three days while its receipts are being deposited and cleared. :hat is the firm s net float in dollars8 a. 015, b. 0 6, c. 0 &, d. 0 *,
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9. :hat is the opportunity cost of keeping a cash balance of 0 million, if the daily interest rate is .E and the average transaction cost of investing money overnight is 08 !. 0 3. 0& C. 0* +. 0*, ;. Hakuna 7nc. sells on terms of &B1, net & days. Gross sales for the year are ),*, and the collections department estimates that &E of the customers pay on the 1th day and take discounts *E pay on the &th day and the remaining &E pay, on the average, * days after the purchase. !ssuming &5 days per year, what is the average collection period. a. * days. c. days b. 15 days. d. 27 days. ?uestions 1 and 11 are based on the following information. ! company has a 1E cost of borrowing and incurs fixed costs of 0 for obtaining a loan. 7t has stable, predictable cash flows, and the estimated total amount of net new cash needed for transactions for the year is 016,. 'he company does not hold safety stocks of cash. 1. :hen the average cash balance of the company is higher, the =ist !I the cash balance is =ist 3I. =ist ! =ist 3 !. pportunity cost of holding Higher 3. 'otal transactions costs associated with obtaining Higher C. pportunity cost of holding =ower +. 'otal costs of holding =ower 11. 7f the average cash balance for the company during the year is 0,;15., the opportunity cost of holding cash for the year will be !. 0,;1.5 3. 0*,19&.& C. 09,6. +. 016,. 1. C"4 is a retail mail order firm that currently uses a central collection system that re%uires all checks to be sent to its 3oston head%uarters. !n average of days is re%uired for mailed checks to be received, * days for C"4 to process them and 1J days for the checks to clear through its bank. ! proposed lockbox system would reduce the mail and process time to & days and the check clearing time to 1 day. C"4 has an average daily collection of 01,. 7f C"4 should adopt the lockbox system, its average cash balance would increase by a. 0,. b. 0*,. c. 05,. d. 09,. 1&. :hat are the expected annual savings from a lockbox system that collects checks per day averaging 0 each, and reduces mailing and processing times by . and . days, respectively, if the annual interest rate is 5E8 !. 0, 3. 01, C. 05, +. 01, 1*. ! company has daily cash receipts of 01,. 'he treasurer of the company has investigated a lock box service whereby the bank that offers this service will reduce the company s collection time by four days at a monthly fee of 0,. 7f money market rates average *E during the year, the additional annual income >loss@ from using the lock box service would be a. 05,. b. 0>5,@. c. 01,. d. 0>1,@.
1. ! banker has offered to set up and operate a lock box system for your company. +etails are given below. !verage number of daily payments & !verage si#e of payments 01, +aily interest rate .1E /aving in mailing time 1.& days /aving in processing time .; days 3ank charges 0.& stimate the annual savings.!ssume processing days per year. !. 0&,6& 3. 0,56 C. 0&, +. 0*6,
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15. ?4/ makes large cash payments averaging )16, daily. 'he company changed from using checks to sight drafts which will permit it to hold unto its cash for one extra day. 7f ?4/ can use the extra cash to earn 1*E annually, what annual peso return will it earn8 a. )5.1 b. )5,1. c. )5. d. ),&9 16. /ixty percent of 3aco2s annual sales of 0;, is on credit. 7f its year-end receivables turnover is *., what is the average collection period and the year-end receivables, respectively >assume a &5-day year@8 !. 91 days and 01,. C. 6& days and 019,. 3. 6& days and 01,. +. 91 days and 0,. 19. 3est Computers believes that its collection costs could be reduced through modification of collection procedures. 'his action is expected to result in a lengthening of the average collection period from & to & days however, there will be no change in uncollectible accounts, or in total credit sales. $urthermore, the variable cost ratio is 5E, the opportunity cost of a longer collection period is assumed to be negligible, the company2s budgeted credit sales for the coming year are 0*,,, and the re%uired rate of return is 5E. 'o (ustify changes in collection procedures, the minimum annual reduction of costs >using a &5-day year and ignoring taxes@ must be !. 0&6, 3. 0&6, C. 01, +. 0, ?uestions 1; and are based on the following information. /nobi#, 7nc. has 0 million invested in 'reasury bills yielding 9E per annum this investment will satisfy the firm2s need for funds during the coming year. 1;. 7f it costs 0 to sell these bills, regardless of the amount, how much should be withdrawn at a time8 !. 0, 3. 01, C. 0, +. 0, . 7f /nobi#, 7nc. needs 0156, a month, how fre%uently should the C$ sell off 'reasury bills8 !. !bout every & days. C. !bout every 1 days. 3. !bout every ; days. +. !bout every 19 days. 1. 'en ? s 7nc. has an inventory conversion period of 5 days, a receivable conversion period of & days, and a payment cycle of 5 days. 7f its sales for the period (ust ended amounted to );6,, what is the investment in accounts receivable8 >!ssume &5 days a year.@ a. )9, b. )6,* c. );*, d. )6;,5
. /imba Corp., whose gross sales amounted to )1,, sold on terms of &B1, net &. 'he collections manager estimated that &E of the customers pay on the 1th day and take discounts *E on the &th day and the remaining &E pay, on the average, * days after the purchase. 7f management would toughen on its collection policy and re%uire that all nondiscount customers pay on the &th day, how much would be the receivables balance8 a. )5, b. )9, c. )6, d. Kero &. )rest Corp. plans to tighten its credit policy. 3elow is the summary of changesA ld ew !verage number of days collection 6 4atio of credit sales to total sales 6E 5E )ro(ected sales for the coming year is )1 million and it is estimated that the new policy will result in a E loss if the new policy is implemented. !ssuming a &5-day year, what is the effect of the new policy on accounts receivable8 a. +ecrease of )1& million. c. +ecrease of ) million. b. o change. d. +ecrease of ) 5.56 million.
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*. umero 1 Co. s budgeted sales for the coming year are );5 million, of which 9E are expected to be credit sales at terms of nB&. 'he company estimates that a proposed relaxation of credit standards would increase credit sales by &E and increase the average collection period form & days to * days. 3ased on a &5-day year, the proposed relaxation of credit standards would result to an increase in accounts receivable balance of a. )5,99, b. )1,;, c. ),99, d. )5,9,
. )hillips Glass Company buys on terms of B1, net &. 7t does not take discounts, and it typically pays & days after the invoice date. et purchases amount to 06, per year. n average, how much free trade credit does )hillips receive during the year8 >!ssume a &5day year.@ a. 0&, b. 0*, c. 0, d. 05,
5. /lippers "art has sales of )& million. 7ts credit period and average collection period are both & days and 1E of its sales end as bad debts. 'he general manager intends to extend the credit period to * days which will increase sales by )&,. However, bad debts losses on the incremental sales would be &E. Costs of products and related expenses amount to *E exclusive of the cost of carrying receivables of 1E and bad debts expenses. !ssuming &5 days a year, the change in policy would result to incremental investment in receivables of a. )*,6*. b. )5,. c. )61,6& d. );,6. 6. 'he =iberal /ales Co. budgeted sales for the coming year are )& million of which 9E are expected to be on credit. 'he company wants to change its credit terms from nB& to B1, nB&. 7f the new credit terms are adopted, the company estimates that cash discounts would be taken on *E of the credit sales and the new uncollectible amount would be unchanged. 'he adoption of the new credit terms would result in expected discount availed of in the coming year of a. )5, b. )99, c. )*9, d. )1;, 9. "r. /. "art assumed the presidency of 4iches Corp. He instituted new policies and with respect to credit policy, below is a summary of relevant informationA ld Credit )olicy ew Credit )olicy /ales )1,9, )1,;9, !verage collection period & days &5 days 'he company re%uires a rate of return of 1E and a variable cost ratio of 5E.
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&. :asting 4esource Co. has annual credit sales of )* million. 7ts average collection period is * days and bad debts are E of sales. 'he credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to E of total sales, and the average collection period would fall to & days. However, sales would also fall by an estimated ), annually. Lariable costs are 5E of sales and the cost of carrying receivables is 1E. !ssuming a tax rate of &E and &5 days a year, the incremental change in the profitability of the company if stricter policy would b e implemented would be a. Kero as the positive and negative effects offset each other. b. ! reduction in net income by )6,. c. ! reduction in net income by )&9,&. d. ! reduction in net income by )&,*. &1. )hranklin )harms 7nc. purchases merchandise from a company that gives sales terms of B1, net *. )hranklin )harms has gross purchases of 09, per year. :hat is the maximum amount of costly trade credit )hranklin could get, assuming they abide by the suppliers credit terms8 >!ssume a &5-day year.@ a. 096,111. b. 0&,555.6 c. 0*,***. d. 0,55.56 &. Crest Co. has the opportunity to increase annual sales by )1 million by selling to new riskier customers. 7t has been estimated that uncollectible expenses would be 1E and collection costs E. 'he manufacturing and selling costs are 6E of sales and corporate tax is &E. 7f it pursues this opportunity, the after tax profit will a. 7ncrease by )&,. c. 7ncrease by )5,. b. 7ncrease by );6,. d. 4emain the same. &&. ! firm currently sells 0, annually with &E bad debt losses. 'wo alternative policies are available. )olicy ! would increase sales by 0,, but bad debt losses on additional sales would be 9E. )olicy 3 would increase sales by an additional 01, over )olicy ! and bad debt losses on the additional 01, of sales would be 1E. 'he average collection period will remain at 5 days >5 turns per year@ no matter the decision made. 'he profit margin will be E of sales and no other expenses will increase. !ssume an opportunity cost of E. :hat should the firm do8 !. "ake no policy change. 3. Change to only )olicy !. C. Change to )olicy 3 >means also taking )olicy ! first@. +. !ll policies lead to the same total firm profit, thus all policies are e%ual. &*. ! firm that often factors its accounts receivable has an agreement with its finance company that re%uires the firm to maintain a 5E reserve and charges 1E commission on the amount of receivables. 'he net proceeds would be further reduced by an annual interest charge of 1E on the monies advanced. !ssuming a &5-day year, what amount of cash >rounded to the nearest dollar@ will the firm receive from the finance company at the time a 01, account that is due in ; days is turned over to the finance company8 !. 0;&, 3. 0;, C. 09&,6 +. 0;,56 ?uestions & through &6 are based on the following information. $lesher, 7nc.2s credit manager studied the bill-paying habits of its customers and found that ;E of them were prompt. /he also discovered that E of the slow payers and E of the prompt ones subse%uently defaulted. 'he company has &, accounts on its books, none of which has yet defaulted. &. Calculate the total number of expected defaults, assuming no repeat business is on the hori#on. !. 6; 3. 1 C. 1& +. 55 &5. Given average revenues from sales of 01, and the cost of sales of 01,1, what is the average expected profit or loss from extending credit to slow payers8 !. 01 profit. 3. 015* loss. C. 0 loss. +. 05* loss.
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&6. Given revenues from sales of 01, and the cost of sales of 01,1, what would the average level of revenues that makes it worthwhile to extend credit to slow payers8 !. 01,&5*. 3. 01,&9;.6* C. 01,*1.5 +. 01,1.5 &9. n cash discounts, all of the following statements do not apply except a. 7f a firm buys )1, of goods on terms of 1B1, net & and pays within the discount period, the amount paid would be );,. b. 'he cost of not taking a cash discount is always higher than the cost of a bank loan. c. :ith trade terms of B1, net 5, if the discount is taken the buyer receive * days of credit. d. 'he cost of not taking the discount is higher for terms of B1, net 5 than for B1, net &. &;. Dour firm buys on credit terms of B1, net *, and it always pays on +ay *. 7f you calculate that this policy effectively costs your firm 016, each year, what is the firm s average accounts payable balance8 a. 01,&*, b. 05, c. 06, d. 016,
*. /uppose the credit terms offered to your firm by your suppliers are B1, net & days. ut of convenience, your firm is not taking discounts, but is paying after days, instead of waiting until +ay &. Dou point out that the nominal cost of not taking the discount and paying on +ay & is around &6 percent. 3ut since your firm is not taking discounts and is paying on +ay , what is the effective annual cost of your firm s current practice, using a &5-day year8 a. &5.6E b. *&.5E c. 15.;E d. 6&.*E
*1. :hat is the effective annual interest rate on a ;E annual percentage rate automobile loan that has monthly payments8 !. ;E 3. ;.&9E C. ;.91E +. 1.;*E *. Corbin, 7nc. can issue &-month commercial paper with a face value of 01,, for 0;9,. 'ransaction costs will be 01,. 'he effective annuali#ed percentage cost of the financing, based on a &5-day year, will be !. 9.*9E. 3. 9.55E. C. 9.E. +. .E. *&. !3C Company finances all of its seasonal inventory needs from the local bank at an effective interest cost of ;E. 'he firm s supplier promises to extend trade credit on terms that will match the ;E bank credit rate. :hat terms would the supplier have to offer >approximately@8 a. B1, nB5. c. B1, nB;. b. 2/10, n/100. d. 3/10, n/60.
**. ! company has accounts payable of 0 million with terms of E discount within 1 days, net & days >B1 net &@. 7t can borrow funds from a bank at an annual rate of 1E, or it can wait until the &th day when it will receive revenues to cover the payment. 7f it borrows funds on the last day of the discount period in order to obtain the discount, its total cost will be !. 01, less. 3. 06, less. C. 01, less. +. 0*, more. *. very 1 days a company receives 01, worth of raw materials from its suppliers. 'he credit terms for these purchases are B1, net &, and payment is made on the &th day after each delivery. 'hus, the company is considering a 1-year bank loan for 0;,9 >;9E of the invoice amount@. 7f the effective annual interest rate on this loan is 1E, what will be the net dollar savings over the year by borrowing and then taking the discount on the materials8 !. 0&,5* 3. 01,165 C. 0*,9 +. 01,*
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