Working Capital, Trade Credit, and Capital Budgeting MCQs

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

A trade credit discount such as 1/10 net 30. What is the annual cost of not accepting the 1% discount?

• 18.18%

• 20.20%

• 19.19%

• 21.21%

A trade credit discount such as 1/10 net 35. What is the annual cost of not accepting the 1% discount?

• 14.55%

• 15.44%

• 12.35%

• 13.25%

A trade credit discount such as 1/10 net 40. What is the annual cost of not accepting the 1% discount?

• 12.12%

• 11.44%

• 12.55%

• 11.25%

A trade credit discount such as 1/10 net 45. What is the annual cost of not accepting the 1% discount?

• 10.39%

• 10.93%

• 19.03%

• 19.93%

A trade credit discount such as 1/10 net 50. What is the annual cost of not accepting the 1% discount?

• 9.09%

• 10.09%

• 11.09%

• 8.09%

A trade credit discount such as 2/10 net 30. What is the annual cost of not accepting the 2% discount?

• 36.73%

• 37.63%

• 33.67%

• 35.18%

A trade credit discount such as 2/10 net 45. What is the annual cost of not accepting the 2% discount?

• 20.99%

• 21.99%

• 22.99%

• 19.29%

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

• depreciation

• dividends

• interest payments

• taxes