Chapter 18 - Short-Term Finance and Planning Chapter 18 Short-Term Finance and Planning Multiple Choice Questions The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: A operating cycle B inventory period C accounts receivable period D accounts payable period E cash cycle The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the: A operating cycle B inventory period C accounts receivable period D accounts payable period E cash cycle The length of time between the sale of inventory and the collection of the payment for that sale is called the: A operating cycle B inventory period C accounts receivable period D accounts payable period E cash cycle The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the: A operating cycle B inventory period C accounts receivable period D accounts payable period E cash cycle 18-1 Chapter 18 - Short-Term Finance and Planning Central Supply purchased a toboggan for inventory this morning and paid cash for it The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the: A operating cycle B inventory period C accounts receivable period D accounts payable period E cash cycle A graphical representation of the operating and cash cycles is called a(n): A operating chart B cash flow time line C production flow line D component chart E working time line Costs that increase as a firm acquires additional current assets are called _ costs A carrying B shortage C order D safety E trading Costs that decrease as a firm acquires additional current assets are called _ costs A carrying B shortage C debt D equity E payables 18-2 Chapter 18 - Short-Term Finance and Planning Steve has estimated the cash inflows and outflows for his hardware store for next year The report that he has prepared recapping these cash flows is called a: A pro forma income statement B sales projection C cash budget D receivables analysis E credit analysis 10 Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year This arrangement is called a(n): A floor loan B open loan C compensating balance D line of credit E bank note 11 Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a: A compensating balance B secured credit deposit C letter of credit D line of credit E pledge 12 Brustle's Pottery either factors or assigns all of its receivables to other firms This is known as: A accounts receivable financing B pledged financing C capital funding D daily funding E capital financing 18-3 Chapter 18 - Short-Term Finance and Planning 13 Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral This is an example of a(n): A debenture B line of credit C banker's acceptance D working loan E inventory loan 14 Which one of the following increases cash? A granting credit to a customer B purchasing new machinery C making a payment on a bank loan D purchasing inventory E accepting credit from a supplier 15 Which of the following are uses of cash? I collecting a receivable II increasing inventory III obtaining a bank loan IV paying a supplier for previous purchases A I and III only B II and IV only C I and II only D I, II, and IV only E II, III, and IV only 16 Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0 A paying a supplier for a previous purchase B paying off a long-term debt C selling inventory at cost D purchasing inventory on credit E selling inventory at a profit on credit 18-4 Chapter 18 - Short-Term Finance and Planning 17 Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0 A selling inventory at cost B collecting payment from a customer C paying a payment on a long-term debt D selling a fixed asset for book value E paying a supplier for the purchase of an inventory item 18 Which of the following are sources of cash? I decrease in inventory II increase in accounts receivable III repayment of a bond IV sale of preferred stock A I and III only B I and IV only C II and III only D I, II, and III only E I, III, and IV only 19 Which of the following will increase the operating cycle? I increasing the inventory turnover rate II increasing the payables period III decreasing the receivable turnover rate IV decreasing the inventory level A I only B III only C II and IV only D I and IV only E II and III only 20 Which one of the following equals the operating cycle? A cash cycle plus accounts receivable period B inventory period plus the accounts receivable period C inventory period plus the accounts payable period D accounts payable period minus the cash cycle E accounts payable period plus the accounts receivable period 18-5 Chapter 18 - Short-Term Finance and Planning 21 Which one of the following will decrease the operating cycle? A decreasing the inventory turnover rate B decreasing the accounts payable period C increasing the accounts receivable turnover rate D increasing the accounts payable period E increasing the accounts receivable period 22 The operating cycle describes how a product: A is priced B is sold C moves through the current asset accounts D moves through the production process E generates a profit 23 Which of the following determines the length of the operating cycle? I cash cycle II inventory period III accounts payable period IV accounts receivable period A I and III only B II and IV only C I, II, and IV only D II, III, and IV only E I, II, III, and IV 24 Which of the following will increase the cash cycle, all else constant? I increasing the inventory period II decreasing the accounts receivable turnover rate III increasing the accounts payable period IV decreasing the accounts receivable period A I and II only B III and IV only C I and IV only D I, II, and III only E I, III, and IV only 18-6 Chapter 18 - Short-Term Finance and Planning 25 An increase in which one of the following will decrease the cash cycle, all else equal? A payables turnover B days sales in inventory C operating cycle D inventory turnover rate E accounts receivable period 26 Metal Designs, Inc., historically produced products for inventory Now, the firm only produces a product when it receives an actual order from a customer All else equal, this change will: A increase the operating cycle B lengthen the accounts receivable period C shorten the accounts payable period D decrease the cash cycle E decrease the inventory turnover rate 27 Which of the following statements are correct? I An increase in the accounts payable period shortens the cash cycle II The cash cycle is equal to the operating cycle minus the inventory period III A negative cash cycle is preferable to a positive cash cycle IV The cash cycle plus the accounts receivable period is equal to the operating cycle A I only B III and IV only C I and III only D I and IV only E I, II, and III only 28 Which one of the following statements is correct concerning the cash cycle? A The longer the cash cycle, the more likely a firm will need external financing B Increasing the accounts payable period increases the cash cycle C A positive cash cycle is preferable to a negative cash cycle D The cash cycle can exceed the operating cycle if the payables period is equal to zero E Offering early payment discounts to customers will tend to increase the cash cycle 18-7 Chapter 18 - Short-Term Finance and Planning 29 Which of the following actions will tend to decrease the inventory period? I discontinuing all slow-selling merchandise II selling obsolete inventory below cost just to get rid of it III buying raw materials only as needed for the manufacturing process IV producing goods on demand versus for inventory A I and III only B II and IV only C II, III, and IV only D I, II, and III only E I, II, III, and IV 30 Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days A tightening the standards for granting credit to customers B refusing to grant additional credit to any customer who pays late C increasing the finance charges applied to all customer balances outstanding over thirty days D granting discounts for cash sales E eliminating the discount for early payment by credit customers 31 An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive? A bad debts B accounts receivable turnover rate C accounts receivable period D credit sales E operating cycle 32 If you pay your suppliers five days sooner, then: A your payables turnover rate will decrease B you may require additional funds from other sources to fund the cash cycle C the cash cycle will decrease D your operating cycle will increase E the accounts receivable period will decrease 18-8 Chapter 18 - Short-Term Finance and Planning 33 Which one of the following will increase the accounts payable period, all else constant? A an increase in the cost of goods sold account value B an increase in the ending accounts payable balance C an increase in the cash cycle D a decrease in the operating cycle E an increase in the accounts payable turnover rate 34 Which one of the following managers determines which customers must pay cash and which can charge their purchases? A purchasing manager B credit manager C controller D production manager E payables manager 35 Which one of the following managers determines when a supplier will be paid? A controller B payables manager C credit manager D purchasing manager E production manager 36 A firm with a flexible short-term financial policy will: A maintain a low balance in accounts receivables B only have minimal amounts, if any, invested in marketable securities C invest heavily in inventory D have low cash balances E have tight restrictions on granting credit to customers 37 Which one of the following is indicative of a short-term restrictive financial policy? A purchasing inventory on an as-needed basis B granting credit to all customers C investing heavily in marketable securities D maintaining a large accounts receivable balance E keeping inventory levels high 18-9 Chapter 18 - Short-Term Finance and Planning 38 Which of the following are associated with a restrictive short-term financial policy? I little, if any, investment in marketable securities II liberal credit terms for customers III low cash balances IV increasing inventory levels A I and III only B II and IV only C I and IV only D III and IV only E I, II, and III only 39 The Lumber Mart recently replaced its management team As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating Which of the following should the employees expect as a result of this policy change? I reduction in sales due to stock outs II greater inventory selection III decreased sales due to the new accounts receivable credit policy IV decreased investment in marketable securities A I and II only B II and IV only C I, II, and IV only D I, III, and IV only E I, II, III, and IV 40 A flexible short-term financial policy: A increases a firm's need for long-term financing B minimizes net working capital C avoids bad debts by only selling items for cash D maximizes fixed assets and minimizes current assets E is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs 18-10 Chapter 18 - Short-Term Finance and Planning 87 Juno Industrial Supply has a $150,000 line of credit with a 6.5 percent interest rate The loan agreement requires a percent compensating balance, which is based on the total amount borrowed, and which will be held in an interest-free account What is the effective interest rate if the firm borrows $90,000 on the line of credit for one year? A 6.42 percent B 6.47 percent C 6.50 percent D 6.58 percent E 6.63 percent Amount borrowed = $90,000/(1 - 0.02) = $91,836.73 Annual interest = $91,836.73 × 0.065 = $5,969.39 Effective interest rate = $5,969.39/$90,000 = 6.63 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Interest rate with compensating balance 88 Rachel's has a $50,000 line of credit with Uptown Bank The line of credit calls for an interest rate of percent and a compensating balance of percent The compensating balance is based on the total amount borrowed and will be held in an interest-free account What is the effective annual interest rate if the firm borrows $35,000 for one year? A 7.76 percent B 8.00 percent C 8.17 percent D 8.33 percent E 8.42 percent Amount borrowed = $35,000/(1 - 0.04) = $36,458.33 Annual interest = $36,458.33 × 0.08 = $2,916.67 Effective interest rate = $2,916.67/$35,000 = 8.33 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Effective interest with compensating balance 18-78 Chapter 18 - Short-Term Finance and Planning 89 The Delta Fish Hatchery factors its accounts receivables immediately at a 1.5 percent discount The average collection period is 34 days Assume that all accounts are collected in full What is the effective annual interest rate on this arrangement? A 17.61 percent B 18.20 percent C 18.36 percent D 18.78 percent E 19.04 percent Interest rate for 34 days = 0.015/(1 - 0.015) = 0.015228 Number of periods per year = 365/34 = 10.735294 Effective annual rate = 1.01522810.735294 - = 17.61 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Accounts receivable factoring 90 New York Bank provides Food Canning, Inc a $250,000 line of credit with an interest rate of 1.75 percent per quarter The credit line also requires that percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance Food Canning, Inc.'s short-term investments are paying 1.2 percent per quarter What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest A 4.76 percent B 4.80 percent C 4.89 percent D 7.00 percent E 7.27 percent Effective annual interest = (1.012)4 - = 4.89 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Rate on unused credit line 18-79 Chapter 18 - Short-Term Finance and Planning 91 The Sports Store has a $100,000 line of credit with City Bank The loan agreement requires that percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance The interest rate on the borrowed funds is 1.4 percent per quarter The Sport Store's short-term investments are paying 1.5 percent per quarter What is the effective annual interest rate on the line of credit if The Sports Store borrows the entire $100,000 for one year? Assume any funds borrowed or invested use compound interest A 5.72 percent B 5.76 percent C 6.00 percent D 6.08 percent E 6.14 percent Effective annual interest = (1.014)4 - = 5.72 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Rate on unused credit line 92 Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter The loan agreement also requires that percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance Your shortterm investments are paying 0.20 percent per month What is your effective annual interest rate on this arrangement if you not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest A 2.00 percent B 2.43 percent C 3.18 percent D 7.00 percent E 7.19 percent Effective annual interest = (1.002)12 - = 2.43 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Rate on unused line of credit 18-80 Chapter 18 - Short-Term Finance and Planning 93 New Town Bank offers you a $40,000 line of credit with an interest rate of 1.85 percent per quarter The loan agreement also requires that percent of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance Short-term investments are currently paying 1.1 percent per quarter What is the effective annual interest rate on the line of credit if you borrow the entire $40,000 for one year? Assume any funds borrowed or invested use compound interest A 4.47 percent B 4.58 percent C 7.61 percent D 7.78 percent E 12.33 percent Effective annual interest = (1.0185)4 - = 7.61 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.5 Topic: Short-term borrowing 94 Josie's Craft Shack has a beginning cash balance for the quarter of $1,126 The store has a policy of maintaining a minimum cash balance of $1,000 and is willing to borrow funds as needed to maintain that balance Currently, the firm has a loan balance of $480 How much will the store borrow or repay if the net cash flow for the quarter is -$280? A $0 B $28 C $126 D $154 E $280 Cash deficit = $1,126 - $280 - $1,000 = -$154 The firm needs to borrow $154 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 18-3 Section: 18.6 Topic: Minimum cash balance 18-81 Chapter 18 - Short-Term Finance and Planning 95 The Cement Works has a beginning cash balance for the quarter of $784 Susie, the firm's president, requires that a minimum cash balance of $800 be maintained and requires that borrowing be used to maintain that balance If funds have been borrowed, then she requires that those loans be repaid as soon as excess funds are available Currently, the firm has a loan outstanding of $1,260 How much will the firm borrow or repay this quarter if the quarterly receipts are $3,918 and the quarterly disbursements are $3,774? A borrow $16 B borrow $128 C borrow $144 D repay $128 E repay $144 Cash surplus = $784 + $3,918 - $3,774 - $800 = $128 The firm will repay $128 this quarter AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 18-3 Section: 18.6 Topic: Short-term financial plan 96 At the beginning of the year, you have an outstanding short-term loan of $274 which was used to cover your cash needs for the previous year The interest expense for the year is $19 The projected net cash flow for this year is $123, prior to any payment of principal or interest on this loan What is your anticipated loan balance at year end? A $151 B $170 C $176 D $189 E $193 Loan balance = $274 + $19 - $123 = $170 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 18-3 Section: 18.6 Topic: Short-term financial plan 18-82 Chapter 18 - Short-Term Finance and Planning Essay Questions 97 List and describe the three basic types of secured inventory loans Compare the advantages and disadvantages of these loans The three types are blanket lien, trust receipts, and field warehouse financing The blanket lien is certainly the easiest for the firm since the lender places a lien on the firm's entire inventory Generally, the borrower does not have to provide any details on the inventory items Trust receipt financing requires the borrower and lender to specify the exact inventory item which secures each advance This can be a time-consuming and cumbersome type of financing for the firm Field warehouse financing requires that an independent company supervise the collateral for the lender This, too, can be a cumbersome type of financing Feedback: Refer to section 18.5 AACSB: Reflective thinking Bloom's: Comprehension Difficulty: Basic Learning Objective: 18-3 Section: 18.5 Topic: Secured inventory loans 98 Using two separate graphs, illustrate a flexible and a restrictive short-term financing policy Place costs on the vertical axis and current assets on the horizontal axis On each graph, indicate the shortage costs, carrying costs, total costs, and indicate the optimal investment in current assets Students should replicate graphs A and B in Figure 18.2 in the text Feedback: Refer to section 18.3 AACSB: Reflective thinking Bloom's: Comprehension Difficulty: Basic Learning Objective: 18-2 Section: 18.3 Topic: Financing policies 18-83 Chapter 18 - Short-Term Finance and Planning 99 Assume that long-term interest rates are substantially higher than short-term interest rates and are expected to remain that way for the foreseeable future How does this affect a firm's selection of a financing policy for its current assets? In this situation, firms will tend to prefer short-term debt over long-term debt and thus will tend to opt for a restrictive financing policy Feedback: Refer to section 18.3 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-2 Section: 18.3 Topic: Financing policies 100 Compensating balances are frequently a part of revolving lending arrangements with banks, yet they add to the cost of financing for the borrower Why, then, would borrowers agree to such terms? What other types of alternative financing are available? Revolvers are flexible lending arrangements which make it convenient for firms to borrow funds on short notice for short periods of time This is particularly applicable to firms that adhere to a restrictive financing policy Furthermore, since the compensating balance is typically required only if the borrower draws on the line, the cost is incurred only while loans are outstanding Alternative types of financing include letters of credit, accounts receivable financing, inventory loans, commercial paper, and trade credit Feedback: Refer to section 18.4 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 18-3 Section: 18.4 Topic: Compensating balances 18-84 Chapter 18 - Short-Term Finance and Planning Multiple Choice Questions 101 Details Corp has a book net worth of $8,150 Long-term debt is $1,650 Net working capital, other than cash, is $2,150 Fixed assets are $2,000 How much cash does the company have? A $4,250 B $4,550 C $5,150 D $5,650 E $6,750 Cash = $8,150 + $1,650 - $2,150 - $2,000 = $5,650 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-2 Learning Objective: 18-3 Section: 18.1 Topic: Cash equation 102 The Wake-Up Coffee Company has projected the following quarterly sales amounts for the coming year: Accounts receivable at the beginning of the year are $200 Wake-Up has a 60-day collection period What is the amount of the accounts receivable balance at the end of Quarter 3? A $375 B $450 C $500 D $600 E $700 A/R Q3 end = (60/90) × $750 = $500 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-5 Learning Objective: 18-3 Section: 18.3 Topic: Accounts receivable balance 18-85 Chapter 18 - Short-Term Finance and Planning 103 Consider the following financial statement information for the Bulldog Icers Corporation: How long is the cash cycle? A 36.6 days B 37.2 days C 41.0 days D 41.4 days E 42.8 days Inventory turnover = $58,638/[($9,338 + $11,442)/2] = 5.6437 times Inventory period = 365/5.6437 = 64.67 days Receivables turnover = $91,544/[($5,670 + $6,947)/2] = 14.5112 times Receivables period = 365/14.5112 = 25.15 days Payables turnover = $58,638/[($7,689 + $9,421)/2] = 6.8542 times Payables period = 365/6.8542 = 53.25 days Cash cycle = 64.67 + 25.15 - 53.25 = 36.6 days AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-6 Learning Objective: 18-1 Section: 18.2 Topic: Cash cycle 18-86 Chapter 18 - Short-Term Finance and Planning 104 Your firm has an average collection period of 42 days Current practice is to factor all receivables immediately at a percent discount Assume that default is extremely unlikely What is the effective cost of borrowing? A 28.79 percent B 36.20 percent C 37.78 percent D 40.97 percent E 42.58 percent Number of periods = 365/42 = 8.6905 EAR = {1 + [0.04/(1 - 0.04)]8.6905 - = 42.58 percent AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-7 Learning Objective: 18-3 Section: 18.5 Topic: Factoring receivables 105 Workout Together has projected the following sales for the coming year: Sales in the year following this one are projected to be 18 percent greater in each quarter Assume the firm places orders during each quarter equal to 29 percent of projected sales for the next quarter How much will the firm pay to its suppliers in Quarter if its accounts payable period is 60 days? A $212.67 B $224.33 C $241.67 D $251.33 E $256.67 Q2 payments = (60/90) × 0.29 × $800 + (30/90) × 0.29 × $900 = $241.67 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-8 Learning Objective: 18-3 Section: 18.4 Topic: Payments 18-87 Chapter 18 - Short-Term Finance and Planning 106 The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65 percent of the next quarter's forecasted sales The payables period is 60 days Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per quarter No capital expenditures are planned Sales for the first quarter of the following year are projected at $720 The projected quarterly sales are: What is the amount of the total disbursements for Quarter 2? A $564.27 B $579.43 C $582.15 D $585.30 E $590.67 Payment of accounts = (60/90) × 0.65 × $660 + (30/90) × 0.65 × $590 = $413.83 Total disbursements = $413.83 + (0.16 × $660) + $60 = $579.43 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-9 Learning Objective: 18-3 Section: 18.4 Topic: Payments 18-88 Chapter 18 - Short-Term Finance and Planning 107 The following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2009: The accounts receivable balance at the end of the previous quarter was $45,000 ($32,000 of which was uncollected December sales.) What is the amount of the January collections? A $112,400.00 B $112,408.16 C $115,703.03 D $122,356.33 E $125,400.00 January collections = 0.67 × $120,000 + (0.23/0.33) × $32,000 + $45,000 - $32,000 = $115,703.03 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-10 Learning Objective: 18-3 Section: 18.4 Topic: Cash collections 18-89 Chapter 18 - Short-Term Finance and Planning 108 Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2009: The company predicts that percent of its credit sales will never be collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61 percent will be collected in the following month Credit purchases will be paid in the month following the purchase In March 2009, credit sales were $302,400, and credit purchases were $224,640 The April cash balance was $403,200 What is the cash balance at the end of May? A $348,887 B $366,846 C $414,141 D $457,777 E $477,374 April cash balance = $403,200 + (0.36 × $547,200) + (0.61 × $302,400) - $224,640 $57,240 - $16,410 - $119,520 = $366,846 May cash balance = $366,846 + (0.36 × $570,240) + (0.61 × $547,200) - $211,680 - $69,420 - $16,410 - $131,040 = $477,374 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-11 Learning Objective: 18-3 Section: 18.4 Topic: Cash budget 18-90 Chapter 18 - Short-Term Finance and Planning 109 You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time The interest rate is 0.5 percent per month In addition, percent of the amount that you borrow must be deposited in a non-interest bearing account Assume your bank uses compound interest on its line of credit loans What is the effective annual interest rate on this lending arrangement? A 6.50 percent B 6.62 percent C 6.81 percent D 6.87 percent E 6.94 percent Monthly interest = $50,000,000 (0.005) = $250,000 Amount received = (1 - 0.05) $50,000,000 = $47,500,000 Periodic interest = $250,000/$47,500,000 = 0.005263 EAR = (1 + 0.005263)12 - = 6.50 percent AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-13 Learning Objective: 18-3 Section: 18.5 Topic: Cost of borrowing 18-91 Chapter 18 - Short-Term Finance and Planning 110 A bank offers your firm a revolving credit arrangement for up to $115 million at an interest rate of percent per quarter The bank also requires you to maintain a compensating balance of percent against the unused portion of the credit line, to be deposited in a noninterest-bearing account Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year? A percent B 5.0 percent C 5.2 percent D 5.3 percent E 5.5 percent EAR = (1 + 0.013)4 - = 5.30 percent AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 18-14 Learning Objective: 18-3 Section: 18.5 Topic: Cost of borrowing 18-92 ... deficit is a: A long-term secured bank loan B short-term secured bank loan C short-term issue of corporate bonds D long-term unsecured bank loan E short-term unsecured bank loan 54 The primary difference... credit C banker's acceptance D working loan E inventory loan 14 Which one of the following increases cash? A granting credit to a customer B purchasing new machinery C making a payment on a bank. .. agreement with its bank that it can borrow up to $10,000 at any time over the next year This arrangement is called a(n): A floor loan B open loan C compensating balance D line of credit E bank note 11