Questions and Practice Problems
Multiple Choice Questions
1. Which of the following is not near-cash?
b. Commercial paper
c. Bankers' acceptances
d. Long-term debt
2. Which of the following descriptions about near-cash is false?
a. Low returns
b. Great liquidity
c. Minimal additional risk
d. Credit risk
3. Which of the following statements about float time is false?
a. Historically, mailing time is the shortest.
b. An efficient credit policy speeds up inflows.
c. Cheque-processing time is one source of float.
d. Using preauthorized payment is one way to shorten float time.
4. A firm is offered by its supplier the following credit terms: 2/30 net 45. The sales
price of the products is $1,000. What is the effective annual cost of forgoing the
5. Which of the following statements about bank loans is false?
a. The rate is normally variable.
b. Lines of credit usually link to the firm's chequing account.
c. Operating loans are usually secured by accounts receivable and inventory.
d. The cost of operating loans is quite high.
6. Suppose a firm is offered a two-year variable rate monthly pay loan at prime plus 1 percent, with a prime rate of 5 percent. What is the effective annual cost of the loan
regardless of other fees?
7. Which of the statements about money market instruments is false?
a. They provide large amounts of short-term financing for firms with good credit
b. Two main types available are: commercial paper and bankers' acceptances.
c. They are similar to bonds.
d. CP can be issued by any firm that needs large amounts of short-term financing.
8. Which of the following statements about factor arrangements is false?
a. A factor is an independent company.
b. A factor often checks the credit of new customers.
c. Factor arrangements can be costly.
d. A factor does not purchase accounts receivable from its clients.
9. Which of the following is a weakness of the inventory turnover ratio?
a. It does not measure costs incurred due to a shortage of inventory.
b. It does not explicitly measure financing costs.
c. It cannot be used to compare companies that use different methods to account for
d. All of the above.
10. Explain how commercial paper differs from bankers' acceptances.
11. What are three major sources of float? What are some common methods that address
12. Explain the function of a factor in working capital management.
13. What is the purpose of credit analysis and how is it accomplished?
14. When deciding whether or not to extend credit to an applicant, what two things need
to be established about the applicant?
15. What are captive finance companies? 16. What are some of the advantages of carrying inventories?
17. What are some of the disadvantages of carrying inventories?
18. Explain the transactions motive.
19. State the principle of the optimal cash balance.
20. Montreal Brewers is going to issue $50 million of 90-day commercial paper for net
proceeds of $49 million. Montreal Brewers must maintain a $5 million credit line, on
which it must pay a standby fee of 0.2 percent. What is the commercial paper's
effective annual cost?
21. Habitant Maple Syrup Sweets Company just issued $10 million of 180-day
commercial paper for net proceeds of $9.9 million. What is the commercial paper's
22. a. Calculate the effective annual cost of forgoing the discount of credit terms of 2/15
net 40. The selling price is $600.
b. Another supplier offers $615 on credit terms of net 60. If you could finance the
purchase by using loans at an effective annual cost of 10 percent for part A, which
option should you choose?
23. What are special purpose vehicles (SPVs)? What is the main advantage of SPVs?
List a few forms of credit enhancement that are critical to SPVs.
24. Suppose Sio Inc. has 60 days of accounts receivable (A/R) of $900,000 on its books.
A factor offers a 60-day A/R loan equal to 90 percent of A/R. The quoted interest
rate is 8 percent, and there is a commission fee of 0.5 percent. The factoring will
result in a reduction of $10,000 in bad debt losses. What is the effective annual cost?
25. What is the effective annual cost if a firm issues $2.5 million face value of 90-day
commercial paper fo