QUESTION 1 Flexibility of the source of financing. ____ tends to require fewer s

Question

QUESTION 1

Flexibility of the source of financing. ____ tends to require fewer specific asset restrictions, while _____ tends to require fewer enterprise restrictions.

Leases; loans

Leases, leases

Loans; loans

Loans, leases

QUESTION 2

_____ is not really buying on credit, whereas _____ is generally free financing for a specified period of time.

Cash on delivery, cash in advance.

Cash in advance; net 30

Net 30, cash in advance

Net 30; 1/15 net 40

QUESTION 3

_____ is often used by manufacturers to significantly lower their production cost. It gives them the ability to produce in a level production mode year round, rather than running two or three shifts at the peak of their demand cycle.

Consignment

Net cash, bill to bill

Seasonal dating

Cash in advance

QUESTION 4

A firm is offered credit terms of 1.5/10, net 40. What would be the cost to this firm of using its vendor as its banker?

18.53%

18.25%

13.90%

17.63%

QUESTION 5

A company estimates its cost of vendor financing (using its vendor as its banker) is 12.2%. It also estimates its effective cost of bank financing to be 9.1%. Which statement best describes this situation?

Can't say for sure what the better funding source would be.

The vendor offers less expensive financing and should be used instead of the bank for that reason.

The company should use its vendor as its financing source, not its bank.

The company should borrow from its bank and take advantage of the trade discount being offered.

QUESTION 6

A company is offered purchase terms of 2/10, net 40. If it can borrow from its bank for 8%, how long would it need to wait to pay its supplier to bring the cost of vendor financing down to 8%, making it a matter of indifference which financing source was used. I.e., instead of paying in 40 days, when would it pay to reduce the cost of vendor financing to 8%, assuming the vendor would permit it?

83 days

93 days

103 days

113 days

QUESTION 7

What is the effective cost of bank financing if the loan amount is $100,000, interest is discounted (advance), a 1% commitment fee is paid up front, and a 9% compensating balance is required? The stated interest rate is 8%.

8.00%

8.98%

10.98%

9.98%

QUESTION 8

Floor planning is best described as:

Consignment with interest

Seasonal dating

Consignment

Receivables financing

QUESTION 9

Coverage ratios as covenants are calculated using values from the _________. Current ratios as covenants are calculated using values from the ______.

Income statement and balance sheet; balance sheet

Income statement; balance sheet

Balance sheet; balance sheet

Income statement; income statement and balance sheet

QUESTION 10

_____________ as a source of short-term financing, is described as spontaneous financing.

Long-term debt

Commercial paper

Bank loans

Trade credit

Leases; loans

Leases, leases

Loans; loans

Loans, leases

Explanation / Answer

Solution 1:

Loans, Leases

Flexibility in the use of particular assets is because of specific restrictions on the use of the assets defined in the lLoan contract. Therefore, Loans defines the restriction on assets.

The leasing agreement defines the restriction on the company or the enterprise as a whole that how it will use the asset and what assets will be collateralize.

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