Question 1

Industry characteristics can affect whether the firm chooses an aggressive, conservative, or maturity matching strategy for financing its assets.

Accepted Answer

A) True 
 B)False

Question 2

If a company can stretch its accounts payable without damaging its credit rating, it is effectively ___________ the cost of foregoing the cash discount.

Accepted Answer

A)  increasing
B)  reducing
C)  not affecting
D)  not able to determine.
E)  none of the above

Question 3

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank.

Accepted Answer

A) True 
 B)False

Question 4

If a company can stretch its accounts payable without damaging its credit rating, it is effectively ___________ its operating cycle.

Accepted Answer

A)  	increasing
B)  	reducing
C)  	not affecting
D)  	not able to determine.
E)  	none of the above

Question 5

If life insurance is pledged as collateral for a loan, how much can be borrowed?

Accepted Answer

A)  face value of the policy
B)  cash surrender of the policy
C)  an amount equal to the annual premium
D)  none of the above

Question 6

In general, short-term self-liquidating bank loans are intended to:

Accepted Answer

A)  help recapitalize a company.
B)  help a company finance merger & acquisitions.
C)  help a company finance seasonal inventory and accounts receivable requirements.
D)  help a company finance investment in capital assets.
E)  none of the above

Question 7

In general, a firm that secures a bank line of credit pays interest on:

Accepted Answer

A)  the full line of credit.
B)  only the amount actually borrowed.
C)  on the unused portion of the line of credit.
D)  on the amount borrowed as well as on the unused portion of the line of credit.
E)  none of the above

Question 8

A revolving credit agreement is a:

Accepted Answer

A)  banker's agreement to extend the maturity of a loan
B)  banker's standby agreement to provide a guaranteed line of credit for a specified period of time
C)  large loan supported by a group of banks on an alternating basis
D)  loan arrangement with a bank whereby secured and unsecured loans are alternately used

Question 9

A short-term bank loan that is unsecured is referred to as:

Accepted Answer

A)  a line of credit
B)  an accounts-receivable loan
C)  an inventory loan
D)  a life insurance policy loan

Question 10

Commercial finance companies obtain loanable funds:

Accepted Answer

A)  to a lesser extent than commercial banks through equity capital
B)  through both long- and short-term borrowing
C)  from the Small Business Administration
D)  primarily from the sale of preferred stock

Question 11

A factor engages in accounts receivable financing for business by purchasing accounts outright and assuming all credit risks.

Accepted Answer

A) True 
 B)False

Question 12

A business that needs short-term credit in excess of its regular line of bank credit may:

Accepted Answer

A)  sell common stock to the bank with a repurchase agreement
B)  subordinate the interests of the owners to the bank's additional loans
C)  make limited use of overdrafts
D)  pledge accounts receivable as specific collateral for an additional loan

Question 13

A firm's choice of financing strategy depends on a number of factors including its operating characteristics, cost, flexibility, and the ease of obtaining future financing.

Accepted Answer

A) True 
 B)False

Question 14

Net working capital is defined as:

Accepted Answer

A)  current assets plus current liabilities
B)  current assets less fixed assets
C)  current assets less current liabilities
D)  current liabilities plus long-term liabilities

Question 15

A line of credit costs the firm only the normal interest for the period during which money is actually borrowed.

Accepted Answer

A) True 
 B)False

Question 16

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it eliminates the need for a credit investigation.

Accepted Answer

A) True 
 B)False

Question 17

The bank line of credit is:

Accepted Answer

A)  the type of business activity on which a particular bank concentrates its lending
B)  the maximum amount of credit extended to a business customer during a period of one year
C)  the average of loans made to a business customer during a year
D)  the loan limit that a bank has established for a business customer

Question 18

Compensating balances at a commercial bank are:

Accepted Answer

A)  net differentials of balances with correspondent banks
B)  maintained by Federal Reserve for services rendered
C)  account balances required in connection with unsecured business loans under bank lines of credit
D)  required vault-held reserves as an alternative to reserves held by Federal Reserve Banks

Question 19

An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyer's bank.

Accepted Answer

A) True 
 B)False

Question 20

When accounts receivable are factored: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Accepted Answer

A) True 
 B)False

Exam 16: Short-Term Business Financing

If a company can stretch its accounts payable without damaging its credit rating, it is effectively ___________ its operating cycle.

Correct AnswerverifiedShow Answer

Compensating balances at a commercial bank are:

Correct AnswerverifiedShow Answer

Industry characteristics can affect whether the firm chooses an aggressive, conservative, or maturity matching strategy for financing its assets.

Correct AnswerverifiedShow Answer

A revolving credit agreement is a:

Correct AnswerverifiedShow Answer

In general, short-term self-liquidating bank loans are intended to:

Correct AnswerverifiedShow Answer

A business that needs short-term credit in excess of its regular line of bank credit may:

Correct AnswerverifiedShow Answer

Net working capital is defined as:

Correct AnswerverifiedShow Answer

In general, a firm that secures a bank line of credit pays interest on:

Correct AnswerverifiedShow Answer

If a company can stretch its accounts payable without damaging its credit rating, it is effectively ___________ the cost of foregoing the cash discount.

Correct AnswerverifiedShow Answer

A firm's choice of financing strategy depends on a number of factors including its operating characteristics, cost, flexibility, and the ease of obtaining future financing.

Correct AnswerverifiedShow Answer

A line of credit costs the firm only the normal interest for the period during which money is actually borrowed.

Correct AnswerverifiedShow Answer

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank.

Correct AnswerverifiedShow Answer

The bank line of credit is:

Correct AnswerverifiedShow Answer

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it eliminates the need for a credit investigation.

Correct AnswerverifiedShow Answer

When accounts receivable are factored: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Correct AnswerverifiedShow Answer

Commercial finance companies obtain loanable funds:

Correct AnswerverifiedShow Answer

A factor engages in accounts receivable financing for business by purchasing accounts outright and assuming all credit risks.

Correct AnswerverifiedShow Answer

An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyer's bank.

Correct AnswerverifiedShow Answer

A short-term bank loan that is unsecured is referred to as:

Correct AnswerverifiedShow Answer

If life insurance is pledged as collateral for a loan, how much can be borrowed?

Correct AnswerverifiedShow Answer

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