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1.Which of the following statements regarding "bankers' acceptances" is true?

I) Bankers' acceptances are used in overseas trading


II) Bankers' acceptances are bought and sold on a discount basis
III) Bankers' acceptances are guaranteed by the bank
A. I only
B. II only
C. III only
D. I, II, and III
2. Short-term financial decisions:
I) involve short lived assets
II) involve short lived liabilities
III) are easily reversed
A. I only
B. II only
C. I, II, and III
D. III only
3. When firms prepare a financial plan they use the following:
I) develop several financial plans using most likely outcomes and also unexpected
outcomes.
II) sensitivity analysis.
III) scenario analysis.
A. I only
B. I and II only
C. I, II, and III
D. II and III only
4.In the United States large-value electronic payments are made through:
I) Fedwire
II) ACH
III) CHIPS
A. I only
B. II only
C. III only
D. I and III only
5.The most important function of a short-term financial plan is:
A. to develop cash budget
B. to cover the forecasted requirements in the most economical way possible
C. to help develop the long-term financial plan
D. none of the above

6.Accounts receivables include:


I) Trade credit
II) Consumer credit
III) Inventories
A. I only
B. II only
C. III only
D. I and II only
7. The cash cycle is represented by the following sequence:
A. Cash, raw materials, finished goods, and receivables, cash
B. Cash, receivables, finished goods, and raw materials, cash
C. Cash, raw material, receivables, finished goods, cash
D. None of the above
8. Cash inflow in cash budgeting comes mainly from:
A. Collection on accounts receivable
B. Short-term debt
C. Issue of securities
D. None of the above
9. The following are the main methods that firms use to send and receive money
electronically:
A. direct payments
B. direct deposits
C. wire transfers
D. all of the above
10. Generally, a line of credit is:
I) Less costly than stretching accounts payable
II) Provided by a bank
III) Unsecured bank borrowing
A. I only
B. I and II only
C. II only
D. I, II, and III
11. Which of the following Moody's rated commercial paper has the least risk?
A. P-1
B. P-2
C. P-3
D. None of the above

12. Short-term financial plan models are offered by:


I) banks
II) accounting firms
III) management consultants
IV) specialized computer software firms
A. I only
B. I and II only
C. I, II and III only
D. I, II III and IV
13. Short-term financial plan models are offered by:
I) banks
II) accounting firms
III) management consultants
IV) specialized computer software firms
A. I only
B. I and II only
C. I, II and III only
D. I, II III and IV
14. Commercial paper (CP) issued in the USA has a maximum maturity of nine months,
most CPs are sold with a maturity of
A. sixty days or less
B. thirty days or less
C. ninety days or less
D. one hundred and eighty days or less
15. The cash budget is the primary short-term financial planning tool. The key reasons a
cash budget is created are:
I) To estimate your investment in assets
II) To estimate the size and timing of your new cash flows
III) To prepare for potential financing needs
A. I only
B. II and III only
C. II only
D. III only
16. A firm can achieve a higher growth rate without raising external capital by: (within
limits)
A. Increasing the proportion of debt in its capital structure
B. Increasing its current ratio
C. Decreasing its inventory turnover
D. Increasing its plowback ratio

17. When credit is granted to another firm this gives rise to a(n):
I) Accounts receivable
II) COD
III) CBD
A. I only
B. II only
C. III only
D. II and III only
18. Generally, banks lend up to the following amount when firms provide receivables as
collateral:
A. 50% of the value of the receivables
B. 60% of the value of the receivables
C. 80% of the value of the receivables
D. 100% of the value of the receivables
19. In the United States export credit insurance is provided by the Export-Import Bank in
association with a group of insurance companies known as the Foreign Credit Insurance
Association (FCIA).
TRUE
20. Short-term financial decisions are conceptually easier to make than long-term
decisions.
TRUE
21. Most firms make a permanent investment in net working capital.
TRUE
22. Concentration banking is used to slow down disbursements.
FALSE
23. Depreciation is not included in sources of cash because it is an expense.
FALSE
24. Two common sources of short-term financing are borrowing from a bank and
stretching payables.
TRUE
25. The market for short-term investments is known as the capital market.
FALSE
26.If a commercial draft is an order to pay immediately, it is called a time draft.
FALSE

27. Financial planning models are generated using spreadsheet programs.


TRUE
28. The growth rate that a company can achieve using external funds is called the internal
growth rate.
FALSE
Problem:
1. Last year Axle Inc. reported total assets of $400, equity of $200, net income of $50,
dividends of $10 and earnings retained in the period of $40. What is Axle Inc.'s
sustainable growth rate?
A. 25.0%
B. 57.1%
C. 20.0%
D. 71.4%
Sustainable growth rate= plowback ratio* return on equity
Sustainable growth rate = (40/50) ( (50/200) = 20%
2. XYZ Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal annual order
costs.A. $200,000
B. $100,000
C. $50,000
D. none of the above
Q = ([(2 ( sales ( cost per order)/(carrying cost)]
Q = ([(2 ( 400,000 ( 500)/(100)] = 2,000 tons
Number of orders per year = 400,000/2000 = 200
Annual order costs = (200) ( (500) = $100,000
3. A customer has ordered goods with a value of $800. The production cost is $600.
Under what conditions should you extend credit if there is no possibility of repeat
orders?
A. If the probability of payment exceeds 0.67
B. If the probability of payment exceeds 0.80
C. If the probability of payment exceeds 0.75
D. If the probability of payment exceeds 0.90

pPV(REV-COST)-(1-p)PV(COST)
p(800 - 600) - (1 - p)(600) = 0; 800p - 600p + 600p - 600 = 0; p = 600/800 = 0.75
4. If the short-term commercial paper rate is 10% and the corporate tax rate is 35%, what
yield would a corporation require on an investment in floating-rate preferred stock?
Assume the default risk is the same as for commercial paper.
A. 15.2%
B. 10.0%
C. 7.3%
D. 6.6%
After-tax yield on CP = 10(1 - 0.35) = 6.5; Effective tax rate on floating-rate preferred
stock = (0.3)(0.35) = 0.105 or 10.5%; Before tax equivalent yield = 6.5/0.895 = 7.3%
5. A company has forecast sales in the first 3 months of the year as follows (figures in
millions): January, $80; February, $60; March, $40. 70% of sales are usually paid for in
the month that they take place, 20% in the following month, and the final 10% in the next
month. Receivables at the end of December were $23 million. What are the forecasted
collections on accounts receivable in March?
A. $180 million
B. $13 million
C. $40 million
D. $48 million
80(0.1) + 60(0.2) + 40(0.7) = 48
6. Last year ABC Co. reported total assets of $500, equity of $200, net income of
$120,dividends of $70 and earnings retained in the period of $50. What is ABC Co.
internal growth rate?
A. 17.5%
B. 30.0%
C. 10.0%
D. 12.5%
Internal growth rate: 50/500 = 10%
7. Supposing you purchase goods on terms of 1/10, net 30. Taking compounding into
account, what annual rate of interest is implied by the cash discount? (Assume a year has
365 days.)
A. 9.6%
B. 9.2%
C. 20.1%
D. 44.6%

Implied interest rate = [(1 + (1/99))^(365/20)] - 1 = 1.201 - 1 = 0.201 = 20.1%


8. Terry's Place is currently experiencing a bad debt ratio of 4%. Terry is convinced that,
with looser credit controls, this ratio will increase to 8%; however, she expects sales to
increase by 10% as a result. The cost of goods sold is 80% of the selling price. Per $100
of current sales, what is Terry's expected profit under the proposed credit standards?
A. $26.0
B. $15.4
C. $13.2
D. $25.6
Expected Profit: (0.92)(110 - 88) - (0.08)(88) = 13.2
9. The default rate of Demurrage Associates' new customers has been running at 10%.
The average sale for each new customer amounts to $800, generating a profit of $100 and
a 40% chance of a repeat order next year. The default rate on repeat orders is only 2%. If
the interest rate is 9%, what is the expected profit from each new customer?
A. $88.70
B. $47.75
C. $43.25
D. $50.83
Expected profit first order: (0.9)(100) - (0.1)(700) = 90 - 70 = +20;
Repeat order: (0.98)(700) - (0.02)(700) = +84;
Expected profit: 20 + ((0.4)(84))/1.09 = 50.83
10. High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs
are $100/ton. The cost per order is $500. Calculate the optimal number of orders per
year.
A. 400
B. 100
C. 200
D. none of the above
Number of orders per year = 400,000/2000 = 200