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Exam 27: Providing and Obtaining Credit

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Question 1

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Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,with interest prepaid (a discounted loan) .Also,assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value.What effective annual interest rate are you being charged?

A) 14.00%
B) 8.57%
C) 16.28%
D) 21.21%
E) 28.00%

F) B) and D)
G) A) and E)

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Question 2

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Danby Design Inc.has approached the bank with its plan to borrow $12,000.The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?

A) 5.10%
B) 10.19%
C) 12.00%
D) 20.38%
E) 30.57%

F) A) and D)
G) A) and C)

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Question 3

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The percentage aging schedule of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.

Tillyard Inc.requires a $25,000 1-year loan.The bank offers to make the loan,and it offers you three choices: (1) 15 percent simple interest,annual compounding; (2) 13 percent nominal interest,daily compounding (360-day year) ; (3) 9 percent add-on interest,12 end-of-month payments.The first two loans would require a single payment at the end of the year,the third would require 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rates?

The uncollected balances schedule is constructed at the end of a quarter by dividing the dollar amount of remaining receivables from each month in that quarter by that month's sales.

The primary reason to monitor aggregate accounts receivable is to see if customers,on average,are paying more slowly.

If sales are seasonal,the days sales outstanding will fluctuate from month to month,even if the amount of time customers take to pay remains unchanged.

No Tree Too Tall,Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on,one-year installment loan,payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?

Darren's Hair Products,Inc.purchases supplies from a single supplier on terms of 1/10,net 20.Currently,Darren takes the discount,but she believes she could extend the payment to 40 days without any adverse effects if she decided not to take the discount.Darren needs an additional $50,000 to support an expansion of fixed assets.This amount could be raised by making greater use of trade credit or by arranging a bank loan.The banker has offered to loan the money at 12 percent discount interest.Additionally,the bank requires an average compensating balance of 20 percent of the loan amount.Darren already has a commercial checking account at this bank that could be counted toward the compensating balance,but the required compensating balance amount is twice the amount that Darren would otherwise keep in the account.Which of the following statements is most correct?

Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop.Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent.If Maxwell must actually receive $100,000 net proceeds to finance its crop,then what must be the face value of the note?

Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped.However,planting,irrigating,and harvesting must be done on a nearly continual schedule.The firm uses 90-day bank notes to finance its operations.The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually.What is the effective annual interest rate of these discount loans?

DSO analysis of accounts receivable is the most robust way to see if customers are,on average,paying more slowly,because it is unaffected by seasonal changes in sales.

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Sunnydale Organics,Inc.harvests crops in roughly 90-day cycles based on a 360-day year.The firm receives payment from its harvests sometime after shipment.Due in part to the firm's rapid growth,it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest.If the firm requires $60,000 in proceeds from each note,what must be the face value of each note?

The collection process,although sometimes difficult,is a fairly inexpensive component of doing business.

The Arthos Group needs to borrow $200,000 from its bank.The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest.What is the effective annual rate (EAR) of this loan?

Which of the following is not correct for a firm with seasonal sales and customers who all pay promptly at the end of 30 days?

The collection process,although sometimes difficult,is also expensive in terms of out-of-pocket expenses.

Which of the following statements is most correct?

Credit standards refer to the financial strength and importance of a potential customer to the firm required in order to qualify for credit.