BUS 201 Corporate Finance Homework #2, June 1, 2016 True or False Questions 19.
ID: 2733939 • Letter: B
Question
BUS 201 Corporate Finance Homework #2, June 1, 2016
True or False Questions
19. Long term lenders are most interested in Leverage Ratios
20. Stockholders are most interested in Profitability Ratios
Multiple Choice Questions
1. From the banker's point of view, short-term bank credit is an excellent way of financing
A. fixed assets.
B. working capital needs.
C. repayment of long-term debt.
D. plant & equipment
2. The firm's net credit position is its:
A) assets minus liabilities
B) bank float
C) accounts receivables minus accounts payable
D) current assets minus current liabilities
3. The London Interbank Offered Rate (LIBOR)
A. competes with the U.S. Prime Rate for those companies with an international presence.
B. has been lower than the U.S. Prime Rate for at least the last decade.
C. is the interest rate banks in England charge each other for short term loans
D. All of these options are correct.
4. General Rent-All's officers arrange a $50,000 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 compensating balance.
C. a discounted loan.
D. a balloon payment.
5. Analog Computers needs to borrow $475,000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $475,000 spendable cash?
A. $546,250
B. $758,264
C. $558,824
D. None of these options
6. If Analog Computers can borrow at 8% for 180 days. What is the effective rate of interest on a $1,000,000 loan where a 15% compensating balance is required?
A. 18.80%
B. 17.27%
C. 9.41%
D.None of these options
7. A term loan is usually characterized by
A. a maturity of one to seven years.
B. a variable interest rate.
C. monthly or quarterly installment payments.
D. All of these options
8 Kenneth's Arrows and Bows borrow $15,000 for one year at 8% interest. What is the effective rate of interest if the loan is discounted?
A. 8%
B. 9.5%
C. 8.7%
D. 10.5%
9. Ms. Smith borrowed $2,000 at an 8% stated rate of interest and was to pay back the loan in 12 monthly payments. What is her effective rate of interest using the installment loan formula?
A. 10.5%
B. 14.8%
C.18.9%
D.22.0%
10. Commercial paper is very popular with many firms because
A. it can usually be issued below the prime rate.
B. it satisfies the firm's need for long-term funds.
C. there are no required lines of credit at the bank.
D. Both A & C
11. ABC Company can borrow from its bank at 12% to take a cash discount. The terms of the cash discount are 2/10, net 50. ABC Company should:
Borrow from the bank to take the cash discount
Not borrow from the bank and not take the cash discount
SHOW YOUR WORK
12. The largest provider of short-term credit for a business is/are:
A) banking organizations
B) suppliers to the firm (trade creditors)
C) commercial paper
D) Eurodollars
13. If a bank offers a firm a simple interest loan of $1,000 for 120 days at a cost of $60 interest, what is the effective rate of interest on the loan?
A) 18%
B) 6%
C) 20%
D) None of the above
14. If a firm is given trade credit terms of 2/10, net 30, then the cost of the firm failing to take the discount is:
A) 2%
B) 30%
C) 36.7%
D 10%
15. Bob’s Boxes Inc. has two divisions. Division A has a profit of $165,000 on sales of $3,010,000. Division B is only able to make $38,900 on sales of $392, 000. Based on the profit margins (returns on sales), which division is superior?
Explanation / Answer
19. TRUE- Long term lenders are most interested in Leverage Ratios Long-term investors analyse how far debts of the company are secured by owners'equity in case of deault by calculating debt-to-equity ratios(Debt/Equity )& Debt ratios(Debt/Total Assets) . They are also interested in interest coverage ratio(Operating Income/Interest expense) to study how many times interest is covered by the income generated , to know the capacity and regularity of interest payments, without any defualt. 20.TRUE- Stockholders are most interested in Profitability Ratios As owners of the company,stockholders are interested in the return of their investment-so they look to profitability ratios like Gross Profit ratio(Gross profit/Sales),Net Profit ratio(NetProfit/Sales), Return on investment(Net Income/Total Investment) Multiple Choice Questions 1. From the banker's point of view, short-term bank credit is an excellent way of financing B. working capital needs(Cash flows of the borrower can easily be ascertained for safety of his funds lent or to be lent) 2. The firm's net credit position is its: C) accounts receivables minus accounts payable 3. The London Interbank Offered Rate (LIBOR) D. All of these options are correct.It is the financial index used in US Capital markets 4. General Rent-All's officers arrange a $50,000 loan. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called B. a compensating balance. 5.C --475000/85*100=558824 6. C (8%*1000000)/(1000000-(15%*1000000)) 0.0941 9.41% 7. A term loan is usually characterized by D. All of these options It is for a fixed term with fixed or variable interest with agreed repayment schedules -monthly or quarterly 10. Commercial paper is very popular with many firms because D. Both A & C - It is unsecured ,short-term & issued at less than prevailing market rates. 12. The largest provider of short-term credit for a business is/are: B) suppliers to the firm (trade creditors) 13 A 18%--60/1000/120*360= 18% p.a. 15 Division B is Superior as it has a profit Margin (9.92%) greater than Division A (5.48%) Division A Profit% =165000/3010000*100=5.48 % Division B Profit% =38900/392000*100=9.92 % 8 C. 8.7% When discounted you get 15000-(8%*15000)=13800 So, Effective rate%=( 8%*15000)/13800= 8.69565 or 8.7%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.