FIN 390 EXAM 3 QUESTIONS WITH VERIFIED
ACCURATE ANSWERS
Suppose a firm wants to take advantage of an upward-sloping yield curve. If the firm
believes that interest rates will stay constant and it wants to use the current yield curve
to bolster profits, which approach should the firm follow?
Conservative approach
Aggressive approach
Maturity matching approach - Answers - Aggressive approach
Suppose a firm occasionally faces demand for short-term credit but usually has an
excess of short-term capital to finance current assets. Which approach is the firm
following?
Aggressive approach
Maturity matching approach
Conservative approach - Answers - Conservative approach
Which usually costs less—short-term or long-term debt?
Long-term debt
Short-term debt - Answers - Short-term debt
Short-term debt or Long-term debt
A firm is worried about a temporary recession in its industry.
A firm believes that interest rates will fall.
A firm wants to avoid prepayment penalties. - Answers - Long
Short-term
Short-term
Both the inventory conversion period and payables deferral period use the average daily
COGS in their denominators, whereas the average collection period uses average daily
sales in its denominator. Why do these measures use different inputs?
Inventory and accounts payable are carried at cost on the balance sheet, whereas
accounts receivable are recorded at the price at which goods are sold.
Current assets should be divided by sales, but current liabilities should be divided by the
COGS. - Answers - Inventory and accounts payable are carried at cost on the balance
sheet, whereas accounts receivable are recorded at the price at which goods are sold.
, Approximately 20% of Newtown Co.'s customers take advantage of the discount and
pay on the 10th day. The remaining 80% take an average of 35 days to pay off their
accounts. What is Newtown Co.'s days sales outstanding (DSO), or the average
collection period?
33.0 days
28.5 days
24.0 days
30.0 days - Answers - 30.0 days
= 0.20×10 days+0.80×35 days
Liabilities that arise from credit purchases - Answers - Trade Credit
Unsecured, short-term promissory notes issued by large firms in denominations of
$100,000 or more - Answers - Commercial paper
A bank requires a borrower to keep a certain percentage of the loan value in an account
at the bank. - Answers - compensating balances
An example of this credit policy decision is "2/10, net 30." - Answers - Cash Discounts
Often, banks will require the owners of a small business to sign personally for the debt
of the company. - Answers - Loan guarantees
This is a loan in which the borrower prepays the interest. - Answers - Discount interest
loan
If payment is not received by a certain date, many firms will employ a collection agency
to collect overdue accounts. - Answers - Collection policy
Making changes to a firm's credit policy involves trade-offs. Assuming that all other
factors remain constant, which of the following are outcomes expected to result from an
increase in a firm's cash discount? Check all that apply.
An increase in the cost of the discounts given
An increase in the firm's bad-debt expenses
A decrease in the creditworthiness of the firm's customers
An increase in the firm's credit sales, a speeding up of customer payments, and a
reduction in the firm's receivables investment - Answers - An increase in the cost of the
discounts given
ACCURATE ANSWERS
Suppose a firm wants to take advantage of an upward-sloping yield curve. If the firm
believes that interest rates will stay constant and it wants to use the current yield curve
to bolster profits, which approach should the firm follow?
Conservative approach
Aggressive approach
Maturity matching approach - Answers - Aggressive approach
Suppose a firm occasionally faces demand for short-term credit but usually has an
excess of short-term capital to finance current assets. Which approach is the firm
following?
Aggressive approach
Maturity matching approach
Conservative approach - Answers - Conservative approach
Which usually costs less—short-term or long-term debt?
Long-term debt
Short-term debt - Answers - Short-term debt
Short-term debt or Long-term debt
A firm is worried about a temporary recession in its industry.
A firm believes that interest rates will fall.
A firm wants to avoid prepayment penalties. - Answers - Long
Short-term
Short-term
Both the inventory conversion period and payables deferral period use the average daily
COGS in their denominators, whereas the average collection period uses average daily
sales in its denominator. Why do these measures use different inputs?
Inventory and accounts payable are carried at cost on the balance sheet, whereas
accounts receivable are recorded at the price at which goods are sold.
Current assets should be divided by sales, but current liabilities should be divided by the
COGS. - Answers - Inventory and accounts payable are carried at cost on the balance
sheet, whereas accounts receivable are recorded at the price at which goods are sold.
, Approximately 20% of Newtown Co.'s customers take advantage of the discount and
pay on the 10th day. The remaining 80% take an average of 35 days to pay off their
accounts. What is Newtown Co.'s days sales outstanding (DSO), or the average
collection period?
33.0 days
28.5 days
24.0 days
30.0 days - Answers - 30.0 days
= 0.20×10 days+0.80×35 days
Liabilities that arise from credit purchases - Answers - Trade Credit
Unsecured, short-term promissory notes issued by large firms in denominations of
$100,000 or more - Answers - Commercial paper
A bank requires a borrower to keep a certain percentage of the loan value in an account
at the bank. - Answers - compensating balances
An example of this credit policy decision is "2/10, net 30." - Answers - Cash Discounts
Often, banks will require the owners of a small business to sign personally for the debt
of the company. - Answers - Loan guarantees
This is a loan in which the borrower prepays the interest. - Answers - Discount interest
loan
If payment is not received by a certain date, many firms will employ a collection agency
to collect overdue accounts. - Answers - Collection policy
Making changes to a firm's credit policy involves trade-offs. Assuming that all other
factors remain constant, which of the following are outcomes expected to result from an
increase in a firm's cash discount? Check all that apply.
An increase in the cost of the discounts given
An increase in the firm's bad-debt expenses
A decrease in the creditworthiness of the firm's customers
An increase in the firm's credit sales, a speeding up of customer payments, and a
reduction in the firm's receivables investment - Answers - An increase in the cost of the
discounts given
