Theories On Short-Term Financing

1. Which of the following statements is not correct?
[A] Larger firms tend to be net users of

trade credit. [B] The largest source of short-term funds for most companies is suppliers
(trade credit). [C] Small companies finance a relatively greater proportion of their assets
through trade credit than do larger concerns. [D] Accounts payable is a spontaneous source of
funds which grows as the business expands.
2. Which of the following statements is not correct? [A] Trade credit can be separated into two
components: free trade credit, which involves credit received after the discount period ends, and
costly trade credit, which is the cost of discounts not taken. [B] As a rule, managers should try to
always use the free component of trade credit but should use the costly component only after
comparing its costs to the costs of similar credit from other sources. [C] Trade credit is an
inexpensive source of short-term financing if no discounts are offered. [D] When deciding
whether or not to take a trade discount, the cost of borrowing funds should be compared to the cost
of trade credit to determine if the cash discount should be taken.
3. Which of the following statements is most correct? [A] Approximately 40% of short-term
financing is in the form of accounts payable or trade credit. [B] A trade discount is a percentage
reduction from the invoice price given for purchasing certain minimum quantitie s. [B] The cost
of not taking a cash discount on 2/10, net 30 credit term is usually less than the prime
rate. [C] The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for
2/10, net 30. [D] Stretching the payment period refers to the practice of trying to take a
trade discount after the discount period.
4. Which of the following statements is most correct? [A] Compensating balances are important
for banks because their existence allows them to make loans at lower quoted rates. [B] On
2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free
credit. [C] Firms can almost always increase the amount of time they take to pay for purchases
without incurring problems. [D] Trade credit is usually extended for periods of one year or
more.
5. Which of the following statements is most correct? [A] The annual percentage rate (APR)
is a measure of the effective rate of interest on a loan on an annualized basis. [B] A cash
discount calls for a reduction in price if payment cannot be made within a specified time
period. [C] Bank deregulation has eased competition between commercial banks, savings
and loans, brokerage houses, and new financial services companies. [D] The lender's
primary concern is whether the borrower's capacity to generate receivables is sufficient to
liquidate the loan as it comes due.
6. Which of the following statements is most correct? [A] Commercial paper is an unsecured
short-term IOU from a large financially secure company. [B] A compensating balance will
be lower in periods of tight money than in periods of credit ease. [C] Compensating
balances represent unfair hidden costs of borrowing. [D] The term "credit crunch" refers
to a period in which the interest rate on credit is so high that firms cannot afford to borrow
money.
7. What is generally the largest source of short-term credit small firms? [A] Trade credit. [B]
Bank loans. [C] Commercial paper. [D] Installment loans.
8. Trade credit may be used to finance a major part of the firm's working capital when [A]
The firm extends less liberal credit terms than the supplier. [B] The firm extends more
liberal credit terms than the supplier. [C] The firm and the supplier both extend the same
credit terms. [D] Neither the firm nor the supplier extends credit.
9. Large firms tend to be [A] Net suppliers of trade credit. [B] Net users of trade credit. [C]
Firms with high levels of profitability. [D] Firms with low levels of inventory turnover
and accounts receivable turnover.
10. From the banker's point of view, short-term bank credit is an excellent way of
financing [A] Seasonal bulges in inventory and receivables. [B] Fixed assets. [C]
Permanent working capital needs. [D] Repayment of long-term debt.
11. The cost of not taking the discount on trade credit of 2/20, net 60 is equal to [A] 16.32%. [B]
18.00%. [C] 17.41%. [D] 18.36%.
12. Bank loans to business firms [A] Are usually short-term in nature. [B] Are preferred by the banker
to be self-liquidating. [C] May require compensating balances. [D] All of these.
13. Which of the following statements is not correct? [A] Short-term financing might be riskier than
long-term financing because, during periods of tight credit, the firm might not be able to rollover
(renew) its debt. [B] One of the advantages of short-term debt financing is that firms can expand
or contract their short-term credit more easily than their long-term credit. [C] Short-term loans
generally are obtained faster than long-term loans because when lenders consider long-term loans
they insist on a more thorough evaluation of the borrower's financial health and because the loan
agreement is more complex. [D] A line of credit and a revolving credit agreement are similar
except that a line of credit creates a legal obligation for the bank.
14. Compensating balances [A] Are created by having a sweep account. [B] Generate returns to
customers from interest bearing accounts. [C] Are used to reward new accounts. [D] Are used by
banks as a substitute for charging service fees.
15. Commercial bank term loans [A] Usually carry fixed interest rates. [B] Are very short-term in
nature. [C] Availed of by all credit applicants. [D] Are offered to superior credit applicants.
16. Aileen Company's officers arrange a P5,000,000 loan. The company is required to
maintain a minimum checking account balance of 10% of the outstanding loan. This
practice is called [A] An installment loan. [B] A discounted loan. [C] A balloon payment.
[D] A compensating balance.
17. If Aileen Computers can borrow at 9.5% for 3 years, what is the effective rate of interest
on a P8,000,000 loan where a 15% compensating balance is required? [A] 5.5%. [C]
17.27%. [C] 9.50%. [D] 11.18%.
18. A term loan is usually characterized by [A] Maturity of one to seven years. [B] A variable
interest rate. [C] Monthly or quarterly installment payments. [D] All of these.
19. In determining the cost of bank financing, which is the important factor? [A] Prime rate.
[B] Nominal rate. [C] Discount rate. [D] Effective rate.
20. Which of the following is the largest category of asset-backed securities? [A] Student
Loans. [B] Automobile Loans. [C] Manufactured Housing Loans. [D] Home Equity
Loans.

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1. Which of the following statements is not correct?

[A] Larger firms tend to be net users of

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