Sources of Short-Term Financing Answer Key 3

59. You are considering buying a new big screen TV from the BIG Electronics Co. BIG has offered to finance your purchase by extending credit to you. The terms of the credit are 12 easy monthly payments of $95. If you choose to finance this purchase, rather than pay the cash price of $850, what would your annual interest on this loan be? A. 20.63% B. 34.12% C. 57.99% D. 74.56% 60. Your employer needs to borrow $550,000 to finance inventory for the upcoming seasonal rush. BIG Bank has offered to finance the inventory at 8% provided that your employer keeps a compensating balance in its operating account of 8%. How much must your employer borrow to end up with the $550,000? A. $597,826 B. $594,000 C. $588,500 D. $87,926 61. Commercial paper was a popular financing method before the credit crunch of 2007-08 due to: A. Higher borrowing rates for qualified firms compared to bank rates. B. Decreased ability of corporations to raise short-term funds. C. Decrease in government borrowing. D. Lower costs to borrowers for bankers' acceptances. 62. Laura's Book Shoppe is going to borrow $50,000 for 90 days at an annual rate of 9%. The amount of interest owing in 90 days will be: A. $4,500.00 B. $1,109.59 C. $1,225.00 D. $1,009.59 63. The largest source of short-term funds for most companies is suppliers (trade credit). TRUE 64. Larger firms tend to be net users of trade credit. FALSE 65. Small companies finance a relatively greater proportion of their assets through trade credit than do larger concerns. TRUE 66. A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities. FALSE 67. Financial institution deregulation has eased competition between banks and foreign financial institutions. FALSE 68. Although the LIBOR has remained competitive and comparable to the Canadian prime rate, it has remained slightly higher than the prime rate. FALSE 69. Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate. FALSE 70. It is difficult to acquire a loan in Canadian dollars outside Canada. FALSE 71. The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate. FALSE 72. Compensating balances have been important for banks because their existence allows them to make loans at lower quoted rates. TRUE 73. A compensating balance will be lower in periods of tight money than in periods of credit ease. FALSE 74. Compensating balances are a way for banks to recover the cost of corporate services provided, but not directly charged. TRUE 75. Commercial paper is an unsecured short-term IOU from a large financially secure company. TRUE 76. Small businesses frequently find commercial paper a useful means of obtaining funds when it is not possible to raise funds by other means. FALSE 77. Accounts payable is a spontaneous source of funds that grows as the business expands. TRUE 78. Stretching the payment period refers to the practice of trying to take a trade discount after the discount period. FALSE 79. On 2/10, net 30 trade terms, if the discount is not taken, the buyer is said to receive 20 days of free credit. FALSE 80. Compensating balances represent unfair hidden costs of borrowing. FALSE 81. Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate. TRUE 82. Issuers of commercial paper can be divided into finance companies and industrial or utility firms. TRUE 83. Commercial paper represents secured short-term borrowing by large companies. FALSE 84. The prime rate has been tied to market interest rates to better relate the interest rate to banks' cost of funds. TRUE 85. One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures. FALSE 86. Eurodollar loans are similar to Canadian bank loans in that they are usually short-term in nature. TRUE 87. In times of tight credit in Canada, Eurodollar loans become difficult to obtain. FALSE 88. The cost of NOT taking a discount is higher for terms of 2/10, net 60 than for 2/10, net 30. FALSE 89. Firms can almost always increase the amount of time they take to pay for purchases without incurring problems. FALSE 90. All commercial paper involves the physical transfer of actual paper certificates. FALSE 91. It is easier for small firms to obtain financing through bank loans than through the commercial paper market. TRUE 92. Even though a firm factors its receivables to a finance company, it is still liable if the account becomes uncollectible. FALSE 93. The sale of securities backed by the receivables of large credit worthy firms is a large source of financing. TRUE 94. Approximately 50% of short-term financing is in the form of accounts payable or trade credit. TRUE 95. Trade credit is usually extended for periods of one year or more. FALSE