12/8/22, 8:37 PM Your Results for "Self-Test Quiz"

Your Results for: "Self-Test Quiz" Print this page

Book Title: Principles of Corporate Finance, Second Summary of Results

Canadian Edition
100% Correct of 25 Scored items:
Location on Site: Chapter 15 > Self-Test Quiz
25 Correct: 100%
Date/Time December 8, 2022 at 12:43 PM (UTC/GMT) 0 Incorrect: 0%
Submitted:
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1. Examples of spontaneous liabilities include all of the following except

Your Answer: bank loans

2. Clark & Sons, which specializes in software design for Internet applications, purchased $2,000
of merchandise on April 1 from a supplier extending terms of 1/10 net 40. In order to take
the cash discount, Clark & Son should

Your Answer: pay $1,980 by April 11

3. Dahlvig Drilling, purchased $23,900 of merchandise on September 17 from a supplier who

extended terms of 1/10 net 40. Dahlvig's cost of capital is 14 percent. What is the annual
percentage cost of giving up the cash discount?

Your Answer: 12.29%

4. Which of the following statements about lines of credit is false?

Your Answer: Both a and b.

5. Gaddis Gadgets, an invention developer, has a $1 million revolving line of credit agreement
with its bank. Over the past year, the company's average borrowing under the agreement was
$800,000. The interest rate on the line of credit averaged 10%. The commitment fee on any
unused portion of the revolving line of credit is 0.75 percent. What was the effective cost of
the revolving credit loan agreement for the past year?

Your Answer: 10.19%

6. JLN Company, a cosmetics manufacturer, has just issued $2.5 million worth of commercial
paper with a 120-day maturity at a price of $2.45 million. Assuming that the paper is rolled
over each 120 days throughout the year, the effective annual rate for JLN commercial paper is

Your Answer: 6.21%

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12/8/22, 8:37 PM Your Results for "Self-Test Quiz"

7. Techniques to obtain secured short-term loans include all of the following except

Your Answer: preparing a letter of credit.

8. Lenders using inventory as collateral have the greatest control with

Your Answer: warehouse receipt loans.

9. A commitment fee is normally charged on

Your Answer: revolving credit agreements

10. The prime rate of interest

Your Answer: is the lowest rate of interest charged by leading banks on loans to their most
secure borrowers

11. _______ accounts payable is the practice of paying bills as late as possible without damaging
the firm's credit rating.

Your Answer: stretching

12. Read the problem below and answer the three questions that follow.

Markham Ltd. just purchased raw materials from its supplier. The materials cost $367,000
and Markham was extended credit terms of 2/20 net 60.

What rate of return must Markham earn in order to be indifferent to taking or not taking the
discount?

Your Answer: 18.62%

13. Markham Ltd. can borrow funds from the bank at a rate of 9%. Markham

Your Answer: should take the discount

14. If for this purchase Markham Ltd. can stretch its payables to 75 days without affecting its
credit rating, which of the following is true?

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12/8/22, 8:37 PM Your Results for "Self-Test Quiz"

Your Answer: Markham's cost of giving up the discount will decrease to 13.54%.

15. Ruxten Company currently pays its employees every second week. The weekly payroll totals
$1,500,000. If the company were to pay its employees every fourth week instead, how much
would Ruxten Company save on a weekly basis? The company has a cost of capital of 12%.

Your Answer: $6,923.08

16. Read the problem below and answer the two questions that follow.

Westwood Ice Cream Parlour wishes to borrow $50,000 at an interest rate of 8% for one year.

If the interest rate on the loan is made at maturity, what is the effective annual interest rate?

Your Answer: 8%

17. If the interest on the loan is paid in advance, what is the effective annual interest rate?

Your Answer: 8.7%

18. Read the problem below and answer the two questions that follow.

Saget Business Supplies borrowed $200,000 from Goodwill Bank. The loan involves a 60-day
note with interest to be paid at the end of the 60 days. The interest rate is a floating rate
based on prime plus 150 basis points. Initially the prime rate is 8% but it is expected to
increase to 8.5% after the first 30 days.

What is the firm's total interest cost during these 60 days? (Ignore compounding effects).

Your Answer: $3,205.48

19. Now assume that the loan is rolled over every 30 days throughout the year based on the
interest rate that applies for the final 30 days of the initial loan agreement. What is the
effective annual interest rate?

Your Answer: 10%

20. Smith & Son Cabinetry has borrowed $500,000 in a line of credit agreement. The stated
interest rate is 9% and the company must maintain a compensating balance equal to 15% of

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12/8/22, 8:37 PM Your Results for "Self-Test Quiz"
the loan amount. What is the effective annual interest rate on the loan?

Your Answer: 10.59%

21. Eastern Steel Products has just issued $5 million worth of corporate paper. The corporate
paper has a 90-day maturity and sells for $4.85 million. What is the annual yield on the
corporate paper?

Your Answer: 12.54%

22. Which of the following statements about collateral is true?

Your Answer: The presence of collateral has no impact on the risk of default.

23. __________ give(s) the bank the right to revoke a line of credit if there were modification's
in a firm's financial condition or operations.

Your Answer: Operating-change restrictions

24. Loans on which interest is paid in advance by being deducted from the amount borrowed are
known as

Your Answer: discount loans

25. To ensure that money lent under a line of credit agreement is actually being used to finance
short-term needs, many banks require

Your Answer: annual cleanups

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