Short & Medium-Term Sources of Finance
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Questions and Answers

What is the net daily purchases of the firm?

  • P82,192
  • P246,575
  • P3,000,000
  • P8,219.18 (correct)

    • What is the average payables if the firm takes discounts?

  • P82,192 (correct)
  • P246,575
  • P8,219.18
  • P164,383

    • What is the primary characteristic that distinguishes short-term financing from medium-term financing?

  • The type of collateral required
  • The repayment period, with short-term financing repayable within 1 year (correct)
  • The interest rate charged
  • The purpose of the financing

    • What is the nominal cost of trade credit of the firm?

    <p>18.43%</p> Signup and view all the answers

    What is the major spontaneous source of short-term financing?

    <p>Trade creditors/Accounts Payables</p> Signup and view all the answers

    What is the formula to calculate the nominal cost of trade credit?

    <p>rNOM = (Discount %) / (Days taken - Disc. period)</p> Signup and view all the answers

    What is the benefit of using trade credit with respect to working capital?

    <p>It helps to keep working capital down</p> Signup and view all the answers

    What is the effective cost of trade credit of the firm?

    <p>20.13%</p> Signup and view all the answers

    What is the cost associated with failing to take discounts on trade credit?

    <p>Opportunity costs</p> Signup and view all the answers

    What is the main factor that influences the trade credit period?

    <p>All of the above</p> Signup and view all the answers

    What is the purpose of accruals in short-term finance?

    <p>To provide spontaneous sources of finance</p> Signup and view all the answers

    What is the typical duration of trade credit extended to customers?

    <p>1 to 3 months</p> Signup and view all the answers

    What is the benefit of trade credit with respect to loan agreements?

    <p>It does not require a formal loan agreement</p> Signup and view all the answers

    What happens if a firm stretches the credit period without compromising its credit rating?

    <p>The firm will have more liquidity</p> Signup and view all the answers

    What is the purpose of a discount rate in trade credit?

    <p>To incentivize customers to pay earlier</p> Signup and view all the answers

    What is the implication of not taking discounts on trade credit?

    <p>It results in opportunity costs</p> Signup and view all the answers

    What type of costs do accrued items, such as wages and taxes, vary directly with?

    <p>Level of sales</p> Signup and view all the answers

    What is a characteristic of accrued items such as wage accruals?

    <p>They are easily manipulated by the firm</p> Signup and view all the answers

    What is a major source of short-term loans to firms?

    <p>Bank loans</p> Signup and view all the answers

    What is the purpose of a self-liquidating loan?

    <p>To carry the firm through seasonal or temporary peaks in financing needs</p> Signup and view all the answers

    What is the interest rate for a 1-year simple interest loan of P100,000 at an 8% nominal rate?

    <p>8.0%</p> Signup and view all the answers

    What is the approximate cost of an add-on interest loan of P100,000 at an 8% nominal rate?

    <p>16.0%</p> Signup and view all the answers

    What is the monthly payment for an add-on interest loan of P100,000 at an 8% nominal rate?

    <p>P9,000</p> Signup and view all the answers

    What is the average loan outstanding for an add-on interest loan of P100,000 at an 8% nominal rate?

    <p>P50,000</p> Signup and view all the answers

    What is the key characteristic of a single payment note?

    <p>It is a one-time loan made to a borrower who needs funds for a specific purpose for a short period</p> Signup and view all the answers

    What is the purpose of a line of credit?

    <p>To make unsecured short-term borrowing available to a firm over a given period of time</p> Signup and view all the answers

    How is the interest rate on a line of credit typically stated?

    <p>As a floating rate tied to the prime rate plus a premium</p> Signup and view all the answers

    What may a bank require from a firm before approving a line of credit?

    <p>The firm's financial statement forecasts</p> Signup and view all the answers

    What is the benefit of a line of credit in terms of creditworthiness?

    <p>It eliminates the need to examine the creditworthiness of the firm each time it borrows</p> Signup and view all the answers

    What is the typical duration of a single payment note?

    <p>30 days to 9 months or slightly more</p> Signup and view all the answers

    What is the effective annual rate (EAR) of the given add-on interest calculator output?

    <p>15.45%</p> Signup and view all the answers

    What is the primary purpose of a bank overdraft facility?

    <p>To bridge the gap between cash income and cash expenses</p> Signup and view all the answers

    How is the interest charged on an overdraft facility?

    <p>On the utilized amount only</p> Signup and view all the answers

    What is a characteristic of a short-term loan?

    <p>It has a fixed period of time to repay the loan</p> Signup and view all the answers

    What is a disadvantage of a bank overdraft facility?

    <p>It is repayable on demand</p> Signup and view all the answers

    What is an advantage of a short-term loan over a bank overdraft?

    <p>It is more secure for the borrower</p> Signup and view all the answers

    What is the range of the overdraft rate of interest above the lender bank's base lending rate?

    <p>2% - 5%</p> Signup and view all the answers

    What is a characteristic of the repayment of a short-term loan?

    <p>It can be either in instalments or a lump sum</p> Signup and view all the answers

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