Corporate Finance【Reading 40】Sample assets, include, example, 2012

karoliukas

An example of a secondary source of liquidity is:

A) negotiating debt contracts.

B) cash flow management.

C) trade credit and bank lines of credit.

---

Secondary sources of liquidity include negotiating debt contracts, liquidating assets, and filing for bankruptcy protection and reorganization. Primary sources of liquidity include ready cash balances, short-term funds (e.g., trade credit and bank lines of credit), and cash flow management

Kingpin804

Which of the following sources of liquidity is the most reliable?

A) Committed line of credit.

B) Uncommitted line of credit.

C) Revolving line of credit.

---

A revolving line of credit is typically for a longer term than an uncommitted or committed line of credit and thus is considered a more reliable source of liquidity. With an uncommitted line of credit, the issuing bank may refuse to lend if conditions of the firm change. An overdraft line of credit is similar to a committed line of credit agreement between banks and firms outside of the U.S. Both committed and revolving lines of credit can be verified and can be listed in the footnotes to a firm’s financial statements as sources of liquidity.

Kingpin804

Which of the following sources of short-term liquidity is considered reliable enough that it can be listed in the footnotes to a firm’s financial statements as a source of liquidity?

A) Factoring agreement.

B) Uncommitted line of credit.

C) Revolving line of credit.

---

With an uncommitted line of credit, the lender is not committed to make loans in any amount. A revolving line of credit is typically for a longer period and involves an agreement to lend funds in the future up to some maximum amount. Factoring does not typically involve an agreement for future receivables purchases.

Kingpin804

Which of the following sources of credit would an analyst most likely associate with a borrower of the lowest credit quality?

A) Uncommitted line of credit.

B) Committed line of credit.

C) Revolving line of credit.

---

Committed lines and revolving lines of credit all contain a commitment by a lender to lend up to a maximum amount, at the borrower’s option for some period of time. A firm with lower credit quality may have an uncommitted line of credit which offers no guarantee from the lender to provide any specific amount of funds in the future.

Kingpin804

A large, creditworthy manufacturing firm would most likely get short-term financing by:

A) factoring its receivables.

B) entering into an agreement for a committed line of credit.

C) issuing commercial paper.

---

Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper. Selling receivables to a factor is a higher cost source of funds used by firms with poor credit quality. A committed line of credit requires payment of a fee and represents bank borrowing, which would be attractive to a firm that did not have the size or creditworthiness to issue commercial paper.

karoliukas

Pfluger Company’s accounts payable department receives an invoice from a vendor with terms of 2/10 net 30. If Pfluger pays the invoice on its due date, the cost of trade credit is closest to:

A) 44.6%.

B) 27.9%.

C) 43.5%.

---

"2/10 net 30" is a discount of 2% of the invoice amount for payment within 10 days, with full payment due in 30 days. Cost of trade credit on day 30 =

karoliukas

A result that is most likely to give a financial manager concern that his firm’s credit policy may have become too lenient is:

A) receivables turnover has increased significantly.

B) weighted average collection period has increased.

C) inventory turnover has decreased considerably.

---

The weighted average collection period is the average number of days it takes to collect a dollar of receivables. A decreased percentage of sales made on credit or an increase in the receivables turnover ratio might result from more strict credit terms. Inventory turnover is not directly affected by credit terms, only though the effect of credit terms on overall sales.

karoliukas

With respect to inventory management,:

A) a firm with inventory turnover higher than the industry average can be expected to have better profitability as a result.

B) a decrease in a firm’s days of inventory on hand indicates better inventory management and can lead to increased profits.

C) an increase in days of inventory on hand can be the result of either good or poor inventory management.

---

An increase in inventory could indicate poor sales and an accumulation of obsolete items or could be the result of a conscious effort to have adequate supplies to avoid losses from not having items to satisfy customer orders (stock outs). Higher-than-average inventory turnover could indicate better inventory management or could indicate that a less than optimal inventory is being maintained by the company.

karoliukas

Which of the following strategies is most likely to be considered good payables management?

A) Paying invoices on the last possible day to still get the supplier’s discount for early payment.

B) Taking trade discounts only if the firm’s annual return on short-term investments is less than the discount percentage.

C) Paying trade invoices on the day they arrive.

---

Paying invoices on the last day to get a discount (for early payment) is often the most advantageous strategy for a firm. If the annualized percentage cost of not taking advantage of the discount is less than the firm’s short-term cost of funds, it would be advantageous to pay on the due date. However, the discount percentage is not an annualized rate, so it cannot be compared directly to the firm's annual return on short-term investments. Paying prior to the discount cut-off date or prior to the due date sacrifices interest income for no advantage.

karoliukas

Yields on firms’ investments in short-term securities for comparison purposes are best stated as:

A) .

B) .

C) .

---

The yields on investments in short-term securities should be stated as bond equivalent yields (BEYs), and returns on portfolios of these securities should be stated as a weighted average of BEYs. The BEY, which is holding period yield × , allows fixed-income securities whose payments are not annual to be compared with securities with annual yields.