QUESTION: 235 Topic 4: Part 2 Sec Four (204 to 257)

A manufacturing firm wants to obtain a short-term loan and has approached several lending institutions. All of the potential lenders are offering the same nominal interest rate but the terms of the loans vary. Which of the following combinations of loan terms will be most attractive for the borrowing firm?

Simple interest, no compensating balance.
Discount interest, no compensating balance.
Simple interest, 20% compensating balance required.
Discount interest, 20% compensating balance required.

Answer(s): A

Explanation:

The most desirable set of terms are those that result in the lowest cost of borrowing. Discount interest results in a higher effective borrowing cost than simple interest because the bank deducts interest in advance so the borrower receives less than the face value of the loan. A compensating balance results in a higher effective borrowing cost because the compensating balance is an amount of cash that the firm is unable to use. The cheapest terms, given that all options have the same nominal interest rate, will be simple interest with no compensating balance.

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QUESTION: 236 Topic 4: Part 2 Sec Four (204 to 257)

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Hendnx, Inc. is interested in purchasing a $100 U.S. Treasury bill and was presented with the following options:

If Hendrix wishes to buy the Treasury bill at the lowest purchasing price, which option should be chosen, assuming a 360- day year?

Option 1.
Option 2.
Option 3.
Option 4.

Answer(s): B

Explanation:

To determine the amount of interest the lender will earn, the 3.5% discount rate is multiplied by the face amount of the Treasury bill). The interest on this Treasury bill is $3.50 ($100 x 3.5% x 1 year); thus, the purchase price is $96.50 ($100 - $3.5).

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QUESTION: 237 Topic 4: Part 2 Sec Four (204 to 257)

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A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. money market rates average 4% during the year, the additional annual income (loss) from using the lockbox service would be

$6,000
$(6,000)
$12,000
$(12,000)

Answer(s): B

Explanation:

It daily cash receipts are $150,000, and the lockbox service will speed collection by four days, the company will have available an additional $600,000 ($150,000 x 4 days). The result is increased interest revenue of $24,000 ($600,000 x 4% interest rate). However, the $2,500 monthly service charges total $30,000 for the year, which is a $6,000 net loss ($24,000 interest revenue - $30,000 monthly service charges).

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QUESTION: 238 Topic 4: Part 2 Sec Four (204 to 257)

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Which one of the following statements about trade credit is correct? Trade credit is

Not an important source of financing for small firms.
A source of long-term financing to the seller.
Subject to risk of buyer default.
Usually an inexpensive source of external financing.

Answer(s): C

Explanation:

Trade credit is a spontaneous source of financing because it arises automatically as part of a purchase transaction. The terms of payment are set by the supplier, but trade credit usually requires payment within a short period of time. Trade credit is an important source of credit for all businesses but especially for buyers, such as small businesses, that might not have access to other credit markets. Like all forms of financing, trade credit is subject to the risk of buyer default.

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QUESTION: 235 Topic 4: Part 2 Sec Four (204 to 257)

Explanation:

QUESTION: 236 Topic 4: Part 2 Sec Four (204 to 257)

Explanation:

QUESTION: 237 Topic 4: Part 2 Sec Four (204 to 257)

Explanation:

QUESTION: 238 Topic 4: Part 2 Sec Four (204 to 257)

Explanation: