Questions and Answers of Contemporary Financial Management

Leases in excess of 30 years are not considered to be leases for tax purposes. L01
The remaining useful life of the equipment at the end of the lease term must be the greater of 1 year or 20 percent of its originally estimated useful life. L01
The various sources of term loan financing?
How to determine whether an asset should be leased or owned? L01
The different classifications of leases and why these classifications matter? L01
The difference between lease financing and ownership, including the benefits and disadvantages of each? L01
Equipment financing loans are commonly made for equipment that is readily marketable. These loans are normally secured with a conditional sales contract or a chattel mortgage.? L01
Term loans are debt obligations having an initial maturity between 1 and 10 years.a. The major suppliers of term loans are banks, insurance companies, pension funds, and equipment suppliers.b. Term
An asset should be leased rather than owned if the present value cost of leasing is less than the present value cost of owning. L01
Leasing decisions are often influenced by the tax and accounting treatment of the transaction. L01
There are several different classifications of leases.a. Operating leases are cancelable, period-by-period leases.b. Financial or capital leases are not cancelable. The lease payments under a
The major parties to a lease are the lessor and the lessee.a. The lessor is the owner of the asset and the party who receives the lease payments.b. The lessee is the user of the asset and the party
A lease is a contract that allows an individual or a firm to make economic use of an asset for a stated period of time without obtaining an ownership interest in the asset. L01
Prepare a pro forma income statement for 2011. Assume that sales increase to$87 million as a result of the plant expansion. Also assume that the cost of sales and selling and administrative expense
Prepare a pro forma balance sheet (dollars and percentages) as of December 31, 2011, assuming that Anderson has instituted all actions described in questions 1, 2, 3, and 4, and that the funds
Anderson’s suppliers extend credit to the firm on terms of “net 30.” Anderson normally pays its bills on the last day of the credit period. How much additional financing could be generated if
How much additional financing can be obtained for fixed-asset expansion if Anderson is able to increase its inventory turnover ratio to the industry average through tighter control of its raw
How much additional financing can be obtained from receivables if Anderson institutes more stringent credit and collection policies and is able to reduce its average collection period to the industry
Anderson’s bank requires a compensating balance of $3 million. How much additional funds can be freed up for investment in fixed assets if the firm reduces its cash balance to the minimum required
Titusville Petroleum Company is considering pledging its receivables to finance an increase in working capital. Citizens National Bank will lend the company 80 percent of the pledged receivables at 2
Calculate the firm’s current, quick, times interest earned, and rate of return on equity ratios based on the pro forma statements determined in questions 5 and 6.How do these ratios compare with
Which of the following credit terms would you prefer as a customer? LO1a. 2/10, net 30b. 1/10, net 40c. 2/10, net 40d. 1/10, net 25e. Indifferent among all options Explain your choice.
Pyramid Products Company has a revolving credit agreement with its bank. The company can borrow up to $1 million under the agreement at an annual interest rate of 9 percent. Pyramid is required to
Determine the annual financing cost of a 6-month (182 day) $20,000 discounted bank loan at a stated annual interest rate of 10 percent. Assume that no compensating balance is required. LO1
Determine the annual financing cost of a 1-year (365 day), $10,000 discounted bank loan at a stated annual interest rate of 9.5 percent. Assume that no compensating balance is required. LO1
Determine the annual financing cost of forgoing the cash discount if the credit terms are "1/10, net 30" and the invoice is not paid until it is 20 days past due. LO1
Calculate the annual percentage rate of forgoing the cash discount under each of the following credit terms:a. 2/10, net 60b. 2/10, net 30 LO1
The Butler-Huron Company’s balance sheet and income statement for last year are as follows:Balance Sheet (in Millions of Dollars)Assets Liabilities and Equity Cash and marketable securities $ 103
The Hopewell Pharmaceutical Company’s balance sheet and income statement for last year are as follows:Balance Sheet (in Millions of Dollars)Assets Liabilities and Equity Cash and marketable
Greenwich Industries has forecasted its monthly needs for working capital (net of spontaneous sources, such as accounts payable) for 2010 as follows:Month Amount Month Amount January $7,500,000 July
Educational Toys, Inc. (ETI) has highly seasonal sales and financing requirements.The company’s balance sheet on December 31, 2009, is as follows:Assets(in Millions of Dollars)Liabilities and
Reynolds Equipment Company is investigating the use of various combinations of short-term and long-term debt in financing its assets. Assume that the company has decided to employ $30 million in
The Garcia Industries balance sheet and income statement for the year ended 2010 are as follows:Balance Sheet (in Millions of Dollars)Assets Liabilities and Stockholders’ Equity Cash $ 6.0 Accounts
The Fisher Apparel Company balance sheet for the year ended 2010 is as follows:December 31, 2010 (in Thousands of Dollars)Assets Cash $ 3,810 Marketable securities 2,700 Accounts receivable 27,480
The Boone Furniture Company is considering factoring its receivables. Its average level of receivables is $4 million, and its average collection period is 70 days. Boone’s bad-debt losses average
The Chalfant Company is considering the use of commercial paper to finance a seasonal need for funds. A commercial paper dealer will sell a $25 million issue maturing in 91 days at an annual interest
Tarentum Industries, Inc., has a revolving credit agreement with its bank under which the company can borrow up to $10 million at an interest rate of 1.5 percentage points above the prime rate
Determine the annual financing cost of a 9-month (274 day), $25,000 discounted bank loan at a stated interest rate of 10.5 percent, assuming that no compensating balance is required. LO1
Determine the annual financing cost of forgoing the cash discount under each of the following credit terms:a. 2/10, net 120b. 2/30, net four months (assume 122 days) LO1
Cranberry Manufacturing Company is considering the following two alternative working capital investment and financing policies:Policy A Policy B Current assets Sales 60% 40%Short-term debt Total
The Stowe Manufacturing Company’s balance sheet and income statement for last year are as follows:Balance Sheet(in Millions of Dollars)Assets Liabilities and Equity Cash and marketable securities $
Under what condition or conditions, if any, might a firm find it desirable to borrow funds from a bank or other lending institution in order to take a cash discount? LO1
What savings are realized when accounts receivable are factored rather than pledged? LO1
Explain why banks normally include a “cleanup” provision in a line of credit agreement. LO1
Explain why the annual financing cost of secured credit is frequently higher than that of unsecured credit. LO1
Explain the difference between a floating lien and a trust receipts arrangement. LO1
Explain the differences between pledging and factoring receivables. LO1
What are some of the disadvantages of relying too heavily on commercial paper as a source of short-term credit? LO1
Explain the differences between a line of credit and a revolving credit agreement. LO1
Define the following: LO1a. Accrued expensesb. Deferred incomec. Prime rated. Compensating balancee. Discounted loanf. Commitment fee
Under what condition or conditions is trade credit not a “cost-free” source of funds to the firm? LO1
Explain the difference between spontaneous and negotiated sources of short-term credit. LO1
How is the annual financing cost for a short-term financing source calculated?How does the annual financing cost differ from the true annual percentage rate? LO1
Define and discuss the function of collateral in short-term credit arrangements. LO1
As the difference between the costs of short- and long-term debt becomes smaller, which financing plan, aggressive or conservative, becomes more attractive? LO1
Discuss the probability versus risk trade-offs associated with alternative combinations of short-term and long-term debt used in financing a company’s assets. LO1
Describe the matching approach for meeting the financing needs of a company.What is the primary difficulty in implementing this approach? LO1
Why is it possible for the effective cost of long-term debt to exceed the cost of short-term debt, even when short-term interest rates are higher than long-term rates? LO1
Describe the difference between permanent current assets and fluctuating current assets. LO1
Discuss the probability versus risk trade-offs associated with alternative levels of working capital investment. LO1
Define and describe the difference between the operating cycle and cash conversion cycle for a typical manufacturing company. LO1
Why does the typical firm need to make investments in working capital? LO1
No one source (or combination of sources) of short-term financing is necessarily optimal for all firms.Many other factors, in addition to the cost of financing, need to be considered when choosing
Several types of inventory loans are available. In a floating lien or trust receipt arrangement, the borrower holds the collateral. In a floating lien arrangement, the lender has a general claim on
Accounts receivable loans can be obtained by either pledging or factoring receivables. In the case of a pledging arrangement, the firm retains title to the receivables, and the lender advances funds
Commercial paper consists of short-term unsecured promissory notes issued by major corporations with good credit ratings. LO1
Short-term bank credit can be extended to the firm under a single loan, a line of credit, or a revolving credit agreement. A line of credit permits the firm to borrow funds up to a predetermined
Trade credit is extended to a firm when it makes purchases from a supplier and is permitted to wait a specified period of time before paying for them. It is normally extended on an open-account
The annual financing cost, AFC, for a short-term credit source is calculated as follows: LO1 AFC ¼ Intersts costs þ fees Usable funds 365 Maturity ðdaysÞ
Trade credit, accrued expenses, and deferred income are the primary sources of spontaneous shortterm credit. Bank loans, commercial paper, accounts receivable loans, and inventory loans represent the
Short-term credit may be either secured or unsecured. In the case of secured credit, the borrower pledges certain assets (such as inventory, receivables, or fixed assets) as collateral for the
No single working capital investment and financing policy is necessarily optimal for all firms. To select the working capital policy that maximizes shareholder wealth, a financial manager should
When the proportion of short-term debt used is increased, both the expected profitability and the risk are increased. Similarly, when the proportion of short-term debt used is decreased, both the
When the level of working capital is increased, both the expected profitability and the risk are lowered.Similarly, when the level of working capital is decreased, both the expected profitability and
Working capital policy is concerned with determining the aggregate amount and composition of a firm’s current assets and current liabilities. LO1
A firm’s operating cycle is equal to the sum of the inventory and receivables conversion periods. The cash conversion cycle is equal to the operating cycle less the payables deferral period. LO1
Working capital is the difference between current assets and current liabilities. The term working capital is used interchangeably with the term net working capital. LO1
The factors that affect working capital policy and the risk-return trade-offs of various working capital policies? LO1
The meaning of the term operating cycle and its role in determining an appropriate working capital policy? LO1
A company can also use its inventory as collateral for a short-term loan. The lender can either allow the borrower to hold the collateral (under a floating lien or trust receipts arrangement) or
A company can use its accounts receivable to obtain short-term financing. It can either pledge the accounts receivable as collateral for a loan or sell (factor ) the receivables to obtain cash. LO1
Commercial paper is a short-term unsecured credit instrument issued by major corporations with good credit ratings. LO1
The types of short-term bank credit include single loans, lines of credit, and revolving credit agreements. LO1
The cost of trade credit is dependent on the size of any cash discount offered and the lengths of the credit and discount periods. LO1
Bank loans, commercial paper, accounts receivable loans, and inventory loans are the major sources of negotiated short-term credit. LO1
Trade credit, or accounts payable, is the principal source of spontaneous short-term credit. LO1
Overall working capital policy involves analyzing the joint impact of the working capital investment decision and the working capital financing decision on the firm’s risk and profitability. LO1
Examination of a firm’s operating cycle and cash conversion cycle is important in analyzing its liquidity. LO1
Determination of the optimal proportions of short- and long-term debt involves profitability versus risk trade-off analysis:a. Higher proportions of short-term debt increase profitability because of
Determination of the optimal level of working capital investment involves profitability versus risk trade-off analysis:a. Higher levels of working capital generally reduce profitability.b. Higher
Working capital policy decisions includea. Investment—level of working capitalb. Financing—proportions of short-term and long-term debt? LO1
Tokyo Electric Company (TEC) sells most of its products in the United States through 50 large distributors and retail chains (e.g., Sears, Kmart, etc.). Currently, TEC’s customers mail their
Two banks, First Fidelity Bank and First Union Bank, have offered to process Zack’s retail charge card payments. First Fidelity will process the payments for a fee of$0.15 per payment with no
Wisconsin Paper Company is considering establishing a zero-balance system for its payroll account. The firm pays its employees every 2 weeks on Friday (that is, 26 pay periods per year). Currently,
Great Lakes Oil Company currently processes all its credit card payments at its domestic headquarters in Chicago. The firm is considering establishing a lockbox arrangement with a Los Angeles bank to
Annual collections from the New England region are $292 million. The total number of payments received annually is 600,000 (an average of 50,000 credit card holders 12 payments per year). Assume
Builders Circle, a hardware and building supplies company, processes all its customer credit card payments at its Atlanta headquarters. A Boston bank has offered to process the payments from Builders
The White Oak Company’s annual sales are $219 million. An average of 9 days elapses between when a customer mails its payment and when the funds become usable by the firm.a. If the company could
What measures can the board of directors of a corporation take to discourage unethical (and illegal) behavior, such as the mail and wire fraud by E. F. Hutton managers described in the chapter?: LO1
What is multilateral netting? Give an example of how this would work for a multinational firm.: LO1

Showing 400 - 500 of 1472