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A current ratio of 2.0 indicates:

a. inventories are too high

b. the firm does not have enough cash

c. the firm is using long term liabilities, preferred stock or equity to finance a portion of its current assets

d. the firm is matching financing across the balance sheet

e. the firm is financing fixed assets with current liabilities

A compensating balance is:

a. a bank discount

b. a credit discount given by a bank

c. a rebate

d. a form of inventory financing

e. none of the above

A formal agreement between a bank and a borrower indicating the maximum pre-arranged credit the bank will extend to borrower is:

a. Line of credit

b. Compensating balance

c. Discount loan

d. Operating loan

e. None of the above

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Beverley Smith
Beverley SmithLv2
28 Sep 2019

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Related questions

QUESTION 1

Flexibility of the source of financing. ____ tends to require fewer specific asset restrictions, while _____ tends to require fewer enterprise restrictions.

a.

Leases; loans
b.

Leases, leases
c.

Loans; loans
d.

Loans, leases

QUESTION 2

_____ is not really buying on credit, whereas _____ is generally free financing for a specified period of time.

a.

Cash on delivery, cash in advance.
b.

Cash in advance; net 30
c.

Net 30, cash in advance
d.

Net 30; 1/15 net 40

QUESTION 3

_____ is often used by manufacturers to significantly lower their production cost. It gives them the ability to produce in a level production mode year round, rather than running two or three shifts at the peak of their demand cycle.

a.

Consignment
b.

Net cash, bill to bill
c.

Seasonal dating
d.

Cash in advance

QUESTION 4

A firm is offered credit terms of 1.5/10, net 40. What would be the cost to this firm of using its vendor as its banker?

a.

18.53%
b.

18.25%
c.

13.90%
d.

17.63%

QUESTION 5

A company estimates its cost of vendor financing (using its vendor as its banker) is 12.2%. It also estimates its effective cost of bank financing to be 9.1%. Which statement best describes this situation?

a.

Can't say for sure what the better funding source would be.
b.

The vendor offers less expensive financing and should be used instead of the bank for that reason.
c.

The company should use its vendor as its financing source, not its bank.
d.

The company should borrow from its bank and take advantage of the trade discount being offered.

QUESTION 6

A company is offered purchase terms of 2/10, net 40. If it can borrow from its bank for 8%, how long would it need to wait to pay its supplier to bring the cost of vendor financing down to 8%, making it a matter of indifference which financing source was used. I.e., instead of paying in 40 days, when would it pay to reduce the cost of vendor financing to 8%, assuming the vendor would permit it?

a.

83 days
b.

93 days
c.

103 days
d.

113 days

QUESTION 7

What is the effective cost of bank financing if the loan amount is $100,000, interest is discounted (advance), a 1% commitment fee is paid up front, and a 9% compensating balance is required? The stated interest rate is 8%.

a.

8.00%
b.

8.98%
c.

10.98%
d.

9.98%

QUESTION 8

Floor planning is best described as:

a.

Consignment with interest
b.

Seasonal dating
c.

Consignment
d.

Receivables financing

QUESTION 9

Coverage ratios as covenants are calculated using values from the _________. Current ratios as covenants are calculated using values from the ______.

a.

Income statement and balance sheet; balance sheet
b.

Income statement; balance sheet
c.

Balance sheet; balance sheet
d.

Income statement; income statement and balance sheet

QUESTION 10

_____________ as a source of short-term financing, is described as spontaneous financing.

a.

Long-term debt
b.

Commercial paper
c.

Bank loans
d.

Trade credit

Which of the following are correct?

While there is no clear relationship between risk and return for individual stocks, on average smaller stocks have both higher risk and returns compared to larger stocks.

The difficulty to predict stock price movements in the short-run shows that stock markets in general can be considered as being inefficient.

The higher the return, the higher the risk, this holds both for individual stocks and diversified portfolios.

According to the research by Eugene Fama, Nobel Laureate in Economics, it is very difficult to predict stock price movements in the short run.

The 95% confidence interval for the expected return is defined as the Historical Average Return plus or minus three standard errors.

Which of the following are correct?

The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds.

Financing part or all of the permanent working capital with short-term debt is known as an aggressive financing policy.

Regardless of the loan structure, the bank may include a compensating balance requirement in the loan agreement that reduces the usable loan proceeds.

Trade credit is a form of loan from a bank to the selling firm to compensate for outstanding receivables.

Firms should monitor accounts payable to make sure that they are making the payments at earliest possible time

8. Which of the following would require a higher return under a risk-adjusted return on capital (RAROC) approach to capital allocation?

a)traditional commercial lending activities

b)government securities

c) home mortgages

d) 2 and 3.

9. Trend analysis often involves

a) comparison of past firm performance to current industry performance

b)averaging past years' performance to remove the effects of accounting changes

c) graphically portraying performance measures over time

d) all of the above

e) 1 and 3

10. Transaction risk is the risk of a loss _______ and translation risk is the risk of a loss _______

a) in the value of a firm’s equity with assets denominated in one currency and liabilities in another; with changes in exchange rates for foreign transactions

b) with changes in exchange rates for foreign transactions; in the value of a firm’s equity with assets denominated in one currency and liabilities in another

c) in the value of a firm’s assets with equity denominated in one currency and liabilities in another; with changes in exchange rates for foreign transactions

d) none of the above

11. The special-purpose vehicle (SPV)

a) allows sales accounting treatment of under generally accepted accounting principles (GAAP)

b) usually reduces the credit rating of the structured securitization

c) monitors reports by the loan servicer on the pool performance

d) all of the above

12. The major financing source for a bank comes from

a) loans

b) deposits

c) equity

d) none of the above

13. The provision for loan losses would likely be

a) increased during economic downturns

b) decreased during economic downturns

c) increased during an economic expansion

d) none of the above

e) 2 and 3

14. The Internet

a) may allow banks to cross-sell products, reduce transaction costs, and improve market presence, service, and quality provided to customers

b) may make customers more loyal to the bank by increasing the convenience and access to a broad variety of services, thereby reducing the probability of customers’ switching institutions

c) has increased costs for financial institutions due to lack of economies of scale

d) 1 and 2

15. Pillar 2 of Basel II

a) includes capital charges for credit risk on a case-by-case basis

b) is mutually enforced by Pillars 1 and 3

c) provides for supervisory review of banks internal assessments of capital allocation and adequacy

d) all of the above

e) 2 and 3

16. Types of loan sales include

a) the novation, which transfers all rights and obligations of the selling bank to the buyer

b) the assignment, which gives the buyer the right to take action against the borrower if payments are not made

c) the participation, in which the bank continues to service the loan

d) all of the above

17. The difference between the book value of capital and the market value of capital for the same institution is influenced by

a) changes in interest rates

b) changes in reserve requirements

c) changes in historic asset costs

d) none of the above

e) all of the above

18. Financial institutions are required to maintain liquid assets for the purpose(s) of

a) meeting repayment obligations to customers holding maturing liabilities

b) meeting repayment obligations to customers holding maturing liabilities. meeting regulatory requirements for reserves

c) meeting the dividend payment requirements of outstanding common stock

d) all of the above

e) 1 and 2

19. The process of securitization typically involves

a) removing loans from a bank's balance sheet and selling them to investors

b) bank origination of loans.

c) an insurance company surety bond or a bank letter of credit

d) all of the above

20. Generally, as the maturity of an asset or liability rises it has a higher risk premium due to greater maturity risk and greater

a) default risk

b) default risk

c) liquidity risk

d) all of the above

e) 2 and 3

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