Finance Worksheet - Multiple Choice Questions

Which of the following statements is CORRECT?

• Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies

• Trade credit is provided only to relatively large, strong firms

• Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate

• Commercial paper is typically offered at a long-term maturity of at least five years

Which of the following statements is NOT CORRECT?

• Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate

• Accruals are "free" in the sense that no explicit interest is paid on these funds

• A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital

• Bank loans generally carry a higher interest rate than commercial paper

Which of the following statements is NOT CORRECT?

• If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60

• A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year

• Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected

• The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans

Which of the following statements is NOT CORRECT?

• An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower

• Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-

Which of the following statements is NOT CORRECT?

• The maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs

• A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan

• A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength

• If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit

Which of the following statements is NOT CORRECT?

• The facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs

• Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities

• Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts

• Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt. This is especially true if the funds are used to finance long-term assets rather than short-term assets

Which of the following is NOT a cash outflow for the firm?

• depreciation.

• dividends.

• interest payments.

• taxes.

All of the following influence capital budgeting cash flows EXCEPT:

• A. method of project financing used.

• B. accelerated depreciation.

• C. salvage value.

• D. tax rate changes.

A single, overall cost of capital is often used to evaluate projects because:

• it avoids the problem of computing the required rate of return for each investment proposal.

• it is the only way to measure a firm's required return.

• it acknowledges that most new investment projects have about the same degree of risk.

• it acknowledges that most new investment projects offer about the same expected return.

The estimated benefits from a project are expressed as cash flows instead of income flows because:

• it is cash, not accounting income, that is central to the firm's capital budgeting decision.

• it is simpler to calculate cash flows than income flows.

• this is required by the Internal Revenue Service.

• this is required by the Securities and Exchange Commission.