CHAPTER 12 (CASH AND MARKETABLE SECURITIES)

1. Which of the following actions would not be consistent with good management?
A. Increased synchronization of cash flows.
B. Minimize the use of floats.
C. Maintaining an average cash balance equal to that required as a
compensating balance or that which minimizes total cost.
D. Use of checks and drafts in disbursing funds. (rpcpa)

2. Which of the following investments is not likely to be a proper investment for

temporary idle cash?
A. Initial public offering of an established profitable conglomerate.
B. Commercial paper.
C. Treasury bills.
D. Treasury bonds due within one year.

3. A precautionary motive for holding excess cash is

A. To enable a company to meet the cash demands from the normal flow of
business activity.
B. To enable a company to avail itself of a special inventory purchase before prices
rise to higher levels.
C. To enable a company to have cash to meet emergencies that may arise
periodically.
D. To avoid having to use the various types of lending arrangements available to
cover projected cash deficits.

4. The following practices will impact the cash flow of the company:
1. Sales personnel are unequivocally responsible for collecting their credit sales.
2. Sales commissions are based on collected invoices.
3. Statement of accounts receivable are reconciled with customers and regularly
sent for confirmation.
4. Automatic transfer of funds is arranged with banks regarding deposits of
branches.

Of the above, which will result to better cash flow?

A. All statements.
B. Statements 1, 3, and 4 only.
C. Statements 3 and 4 only.
D. Statement 4 only.

5. A compensating balance
A. Compensates a financial institution for services rendered by providing it with
deposits of funds.
B. Is used to compensate for possible losses on a marketable securities portfolio.
 C. Is a level of inventory held to compensate for variations in usage rate and lead time.
D. Is the amount of prepaid interest on a loan.

6. An automated clearing house (ACH) electronic transfer is a(an)

A. Electronic payment to a company’s account at a concentration bank.
B. Check that must be immediately cleared by the Bangko Sentral ng Pilipinas.
C. Computer-generated deposit ticket verifying deposit of funds.
D. Check like instrument drawn against the payor and not against the bank

7. A working capital technique that increases the payable float and therefore delays
the outflow of cash is
A. Concentration banking.
C. Electronic data interchange (EDI)
B. A draft
D. A lockbox system.

8. Which one of the following is not a characteristic of a negotiable certificate of

deposit? Negotiable certificates of deposit
A. Have a secondary market for investors.
B. Are regulated by the Bangko Sentral ng Pilipinas.
C. Are usually sold in denominations of a minimum of P100,000.
D. Have yields considerably greater than bankers’ acceptances and commercial
paper.

9. The most direct way to prepare a cash budget for a manufacturing firm is to
include
A. Projected sales, credit terms, and net invoice.
B. Projected net income, depreciation and goodwill amortization.
C. Projected purchases, percentages of purchases paid, and net income.
D. Projected sales and purchases, percentages of collections, and terms of
payments.

10. Given the following events, which affect cash flows from operations?
1. Cash sale
2. Cash dividends paid
3. Purchase of a long-term asset
4. Purchase of inventory
5. Paid employees

A. 1 and 5
B. 1, 3, 4, and 5
C. 1, 2 and 5.
D. 1, 4 and 5.
11. MM Corporation had income before taxes of P60,000 for the year 2006. Included in
this amount was depreciation of P5,000, a charge of P6,000 for the amortization of
bond discounts, and P4,000 for interest expense. The estimated cash flow for the
period is

A. P60,000 C. P49,000
B. P66,000 D. P71,000

12. Bing and Bong’s Store is on the cash basis of preparing its funds statement.
These data are available:

Decrease in working capital P50,000

Depreciation 13,000
Increase in cash 25,000
Repairs and maintenance 19,500
Total uses of cash 454,000

Calculate the total sources of cash of Bing and Bong’s Store .

A. P472,500 C. P479,000
B. P492,000 D. P467,000

13. Shown below is a forecast of sales for Carlos Inc. for the first four months of 2006
(all amounts are in thousands of pesos).

On average, 50% of credit sales are paid for in the month of sale, 30% in the month
following the sale, and the remainder is paid 2 months after the month of sale.
Assuming there are no bad debts, the expected cash inflow for Carlos in March is
A. P138,000 C. P119.000
B. P122,000 D. P108,000

14. Assume that each day a company writes and receives checks totaling P10,000. If it
takes 5 days for the checks to clear and be deducted from the company’s account,
and only 4 days for the deposits to clear, what is the float?
A. P10,000 C. P(10,000)
B. P 0 D. P50,000

15. Butit is a newly established janitorial firm, and the owner is deciding what type of
checking account to open. Butit is planning to keep a P500 minimum balance in the
account for emergencies and plans to write roughly 80 checks per month. The bank
charges P10 per month per P0.10 per check charge for a standard business
checking account with no minimum balance. Butit also has the option of a premium
 business balance that requires a P2,500 minimum balance but has no monthly fees
or per check charges. If Butit’s cost of funds is 10%, which account should Butit
choose?
A. Standard account, because the savings is P34 per year.
B. Premium account, because the savings is P34 per year.
C. Standard account because the savings is P16 per year.
D. Premium account because the savings is P16 per year.

16. Globe Products has received proposals from several banks to establish a lock box
system to speed up receipts. Globe receives an average of 700 checks per day
averaging P1,800 each, and its cost of short-term funds is 7% per year. Assuming
that all proposals will produce equivalent processing results and using a 360-day
year, which one of the following proposals is optimal for Globe?
A. A P0.50 per check.
B. A flat fee of P125,000 per year.
C. A fee of 0.03% of the amount collected.
D. A compensating balance of P1,750,000.

17. Franklin, Inc., is a medium-size manufacturer of toys that makes 25% of its sales to
Mel Company, a major national discount retailing firm. Mel will be requiring Franklin
and other suppliers to use Electronic Data Interchange (EDI) for inventory
replenishment and trade payments transactions as opposed to the paper-based
systems previously used. Franklin would consider all of the following to be
advantages using EDI in its dealings with Mel except
A. Access to Mel’s inventory balances of Franklin’s products.
B. Better status of deliveries and payments.
C. Compatibility with Franklin’s other procedures and systems.
D. Reduction in the payment float.

18. If the average age of inventory is 60 days, the average age of the accounts payable
is 30 days, and the average age of accounts receivables is 45 days, the number of
days in the cash flow cycle is
A. 135 days. C. 75 days.
B. 90 days D. 105 days.

19. RMN is a retail mail order firm that currently uses a central collection system that
requires all checks to be sent to its flotation headquarters. An average of 6 days is
required for mailed checks to be received, 3 days for RMN to process them, and 2
days for the checks to clear through its bank. A proposed lockbox system would
reduce the mailing and processing time to 2 days and the check clearing time for 1
day. RMN has an average daily collection of P150,000. If RMN adopts the lockbox
system, its average cash balance will increase by
A. P1,200,000 C. P600,000
B. P 750,000 D. P450,000
20. A firm has a daily cash receipts of P100,000 and collection time of 2 days. A bank
has offered to reduce the collection time on the firm’s deposits by 2 days for a
monthly fee of P500. If money market rates are expected to average 6% during the
year, the net annual benefit (loss) from having this service is
A. P 3,000 C. P 0
B. P12,000 D. P6,000

21. Troy Toy is a retailer operating in several cities. The individual store managers
deposit daily collections at a local bank in a non-interest bearing checking account.
Twice per week, the local bank issued a depository transfer check (DTC) to the
central bank at headquarters. The controller of the company is considering using a
wire transfer instead. The additional cost of each transfer would be P25; collections
would be accelerated by 2 days, and the annual interest rate paid by the central bank
is 7.2% (0.02% per day). At what amount of pesos transferred would it be
economically feasible to use a wire transfer instead of the DTC? Assume a 350-day
year.
A. It would never be economically feasible.
B. P125,000 or above.
C. Any amount greater than P173.
D. Any amount greater than P62,500.

22. A company uses the following formula in determining the optimal level of cash

This formula is a modification of the economic order quantity (EOQ) formula used for
inventory management. Assume that the fixed cost of selling marketable securities is
P10 per transaction and the interest rate on marketable securities is 6% per year.
The company estimates that it will make cash payments of P12,000 over the one month
period. What is the average cash balance (rounded to the nearest peso)?
A. P1,000 C. P3,464
B. P2,000 D. P6,928

23. A firm has daily cash receipts of P300,000. A bank has offered to provide a lockbox
service that will reduce the collection time by 3 days. The bank requires a monthly
fee of P2,000 for providing this service. If monthly market rates are expected to
average 6% during the year, the additional annual income (loss) of using the lockbox
system is
A. P(24,000) C. P30,000
B. P12,000 D. P54,000

24. The treasury analyst for KG Manufacturing has estimated the cash flows for the first
half of next year (ignoring any short-term borrowings) as follows:
 KG has a line of credit up to P4 million on which it pays interest monthly at a rate of
1% of the amount utilized. KG is expected to have a cash balance of P2 million on
January 1 and no amount utilized on its line of credit. Assuming all cash flows occur
at the end of the month, approximately how much will KG pay in interest during the
first half of the year?
A. Zero C. P 50,000
B. P61,000 D. P132,000

25. On January 07, 2006, Dean Company discounted its own P100,000, 180-day note at
United National Bank at a discount rate of 20%. Dean repaid the note on the July 6,
2005, due date. Based on a 360-day year, the effective rate of interest on the
borrowing was
A. 18.2% C. 22.2%
B. 20.0% D. 25.0%

26. A company obtained a short-term bank loan of P250,000 at an annual interest of 6%.
As a condition of the loan, the company is required to maintain a compensating
balance of P50,000 in its checking account. The company’s checking account earns
interest at an annual rate of 2%. Ordinarily, the company maintains a balance of
P25,000 in its checking account for transaction purposes. What is the effective
interest rate of the loan?
A. 6.44% C. 5.80%
B. 7.00% D. 6.66%

27. Hager Company’s bank requires a compensating balance of 20% on a P100,000

loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?
A. 5.83% C. 6.40%
B. 7.00% D. 8.75%

28. Meals Etc. has been very successful. It is the newest fast food outlet at the Greenbelt
of Makati featuring ordinary Filipino food packed with banana leaves. After six months
of operations, it needs to expand. The owner, Mr. K. Eng estimates that P2.4 million
will be required to put up another outlet in the Ortigas area.
Financing was offered by a friendly banker at 10 percent discounted interest.
Alternatively, Mr. Eng is thinking of just delaying payment to its suppliers. All his sales
are on a cash basis. The company purchases under terms of 2/10, net 40 but Mr. Eng
believes that he could delay payments by another 30 days without any problem. This
means payment could be made in 70 delays. Assuming 360 days a year, Meals Etc.
should opt for

A. Bank loan since its cost of 11.11% is cheaper than the cost of delaying payments
of 12.24%.
B. Delaying payments since it has no cost compared to the 10% discounted bank
interest.
 C. Bank loan since it costs of 10% is cheaper than the cost of delaying payments of
12%.
D. Delaying payments since it costs only 2% compared to 10% discounted bank
interest.

29. Butuan Company recently received a commercial bank loan of 16% discounted rate
with a 20% compensating balance. The term of the loan is one year. The effective
cost of borrowing is:
A. 19.05% C. 22.85%
B. 20.00% D. 25.00%

30. Cool and Sweet obtained a short-term bank loan for P1 million at an annual interest
of 12%. As a condition of the loan, the company is required to maintain a
compensating balance of P200,000 in its savings account which earns interest at an
annual rate of 6%. The company would otherwise maintain only P100,000 on the
savings account for transactional purposes. The effective cost of the loan is
A. 13.20% C. 12%
B. 12.67% D. 13.5%

31. The Ralph, Inc. signed a loan agreement subject to the following terms:
1. Stated interest rate of 18% on a one-year discounted loan; and
2. 15% compensating non-interest bearing checking account balance to be
maintained by Ralph Inc., with Manila Commercial Bank

The net proceeds of the loan was P1 million. The principal amount of the loan was
A. P1,176,471 C. P1,492,537
B. P1,000,000 D. P1,219,512

32. When managing cash and short-term investments, a corporate treasurer is

primarily concerned with
A. Maximizing the rate of return.
B. Maximizing taxes.
C. Investing in Treasury bonds since they have no default mix.
D. Liquidity and safety.

33. All of the following are alternative marketable securities suitable for investment
except
A. RP Treasury Bills. C. Commercial paper.
B. Eurodollars. D. Convertible bonds.

34. The term short selling is the

A. Selling of a security that was purchased by borrowing money from a broker.
B. Selling of a security that is not owned by the seller.
C. Selling of all the shares you own in a company in anticipation that the price will
 decline dramatically.
D. Betting that stock will increase by a certain amount within a given period of time.(cma)

CHAPTER 13 (ACCOUNTS RECEIVABLE AND INVENTORY MANAGEMENT)

I. True or False (Definitions and Concepts)

1. Credit sales create immediate cash.

2. Between firms, trade credit occurs when one firm buys goods or services from
another with simultaneous payment.

3. Consumer credit, or retail credit, is created when a firm sells goods or services to
a consumer without simultaneous payment.

4. Trade credit is effectively a loan from one firm to another.

5. Suppliers do not know how to handle the goods as collateral better than other
lenders such as banks.

6. A supplier generally has poorer information than the customer about the quality
of its products.

7. Credit can provide a cheaply enforced product quality guarantee.

8. By granting credit to the ultimate buyer, the payments mechanism bypasses all of
the agents in the distribution process, requiring only one payment from the ultimate
buyer to the original seller.

9. Credit is not an important part of marketing.

10. Convenience and safety are important for both business and retail customers, but
Psychology is also important, especially at the retail level.

11. Credit-policy affects a firm’s revenues and costs.

12. A more liberal credit policy should decrease the cost of goods sold and increase
the gross profit, bad debt expenses, the cost of carrying additional receivables, and
administrative
costs.
 13. Depending on the industry, credit policy can vary from being crucial to being
irrelevant.

14. Credit terms are the contract between the supplier and credit customer specifying
how the credit will be repaid.

15. The invoice is a written statement about goods that were ordered, along with their
prices and the payment dates.

16. When a firm is using invoice billing, the invoice that accompanies shipment is an
additional bill to be paid.

17. A firm can protect itself from uncertainty by maintaining safety stocks–that is, a
buffer inventory.

18. CIA stands for cash in addition and CBD stands for cash before delivery.

19. Unlike COD, cash terms allow the customer to mail the payment.

20. Although seasonal dating does give buyers a longer time to pay, sellers benefit by
encouraging buyers to make earlier purchase decisions.

II. Multiple Choice (Definitions and Concepts)

21. Credit-policy decisions involve all aspects of receivables management. The

decision does not include which of the following?
a. setting evaluation methods and credit standards
b. the choice of credit terms
c. monitoring receivables and avoiding actions for slow payment
d. controlling and administering the firm’s credit functions

22. Which of the following statements is false?

a. The invoice is a written statement about goods that were ordered, along with their
prices and the payment dates. In other words, the invoice is simply the bill for purchases.
b. For the 4/10, net 40 credit terms, you are offering a total credit period of 30 days
from the date of the invoice, a discount period of 10 days, and a 4% discount if paid on
or before the discount period expires.
c. When a firm is using invoice billing, the invoice that accompanies shipment is a
separate bill to be paid.
d. none of these

23. Which of the following statements is false?

a. When invoices are numerous, a firm may use statement billing instead of invoice
billing.
b. With statement billing, all of the sales for a period such as a month (for which a
customer receives invoices, too) are collected into a single statement and sent to the
customer as one bill.
c. CIA (cash in advance) refers to when the shipper collects the payment (on behalf
of the seller) upon delivery.
d. none of these

24. Which of the following statements is true?

a. The "dating 120" or the "60 extra" mean that the clock does not start until 120 or
60 days after the invoice date.
b. Prox or proximate refers to the next month.
c. Invoices with "10th prox" must be paid by the 10th of the next month.
d. all of these

25. Electronic credit terms .

a. do not reduce uncertainties about payment dates.
b. do not reduce administrative costs.
c. reduce supplier accounts receivable.
d. do not reduce buyer accounts payable.

26. Most credit sales are made on an open account basis, which means .
a. that customers simply purchase what they want.
b. that suppliers dictate the terms of the purchase.
c. that customers cannot simply purchase what they want.
d. that suppliers cannot dictate the terms of the purchase.

27. Credit standards depend on the .

a. variables that determine the NPV of the sale.
b. investment in the sale.
c. probability of payment.
d. all of these

28. Credit standards depend on the .

a. required return.
b. beta of T-bills.
c. payment period.
d. a & c

29. Which of the below statements is false?

a. Higher collection costs reduce the NPV and but cannot cause it to be negative.
b. A customer who is likely to make late payments is also more likely to default and
to require extra collection efforts.
c. Credit bureau reports give information about any legal judgments against the
firm.
d. none of these

30. Internal sources of credit information for a firm include.

a. a credit application.
b. a credit bureau reports.
c. industry association credit files.
d. a & c.

31. says to calculate the incremental cash flows for receivables and
inventory decisions.
a. The Principle of Risk-Return Trade-off
b. The Principle of Capital Market Efficiency
c. The Principle of Diversification
d. The Principle of Incremental Benefits

32. says to compare the NPV of alternative receivables and inventory

decisions.
a. The Time Value of Money Principle
b. The Signaling Principle
c. The Principle of Self-Interested Behavior
d. The Principle of Valuable Ideas

33. says to look for situations that are non zero-sum games; these may be
profitable for you and your supplier or customer.
a. The Time Value of Money Principle
b. The Principle of Incremental Benefits
c. The Principle of Two-Sided Transactions
d. The Principle of Comparative Advantage

34. says to carefully evaluate and monitor the creditworthiness of your

credit customers as well as the quality of goods and services from your suppliers.
a. The Principle of Self-Interested Behavior
b. The Principle of Comparative Advantage
c. The Behavioral Principle
d. The Principle of Incremental Benefits

35. Internal sources of credit information for a firm include .

a. a Dun & Bradstreet Business Credit Services report.
b. information from sales representatives.
c. financial statements for recent years.
d. none of these
36. The Five C's of Credit
a. are five general factors that credit analysts often consider when making a credit
granting decision.
b. include character and coherence.
c. include comfort and capital.
d. include conditions and cooperation.

37. Which of the following statements is false?

a. Credit scoring models are constructed by using sophisticated statistical methods
to analyze the payment records of all future customers.
b. Credit scoring models enable the creditor to accept the clearly good customers
and reject the clearly bad customers very quickly.
c. Credit scoring models allow different loan processors to apply consistent
standards across all credit applicants.
d. Credit scoring models work best when applied to large populations of loan
applicants.

38. Which of the following statements is false?

a. Consumer loan databases often include many thousands of loans, and credit scoring
models can be built readily.
b. Assessing a firm’s ability to pay its debts is a complex judgment, because many
factors affect creditworthiness.
c. Credit scoring combines several financial variables into a single score, or index,
that measures creditworthiness.
d. none of these

39. Which of the following statements is false?

a. Monitoring accounts receivable is critical because of the size of the investment.
b. Receivables balance fractions are tables showing the total dollar amounts and the
percentages of total accounts receivable that fall into several age classifications.
c. An average age of accounts receivable is the average age of all of the firm's
outstanding invoices.
d. Collection fractions are the percentages of sales collected during various months.

40. Which of the following statements is true?

a. ABC system of inventory control looks at the percentages of sales collected
during various months.
b. Businesses follow a number of specific steps in the JIT process, depending on
how long overdue the account is, the size of the debt, and other factors.
c. The collection process can be viewed as a capital budgeting process wherein the
firm wants to use the collection procedures that generate the highest safety stock.
d. A simple and useful inventory management model is the economic order quantity
(EOQ) model.
41. The Five C's of Credit .
a. include collateral and character.
b. include conditions and capacity.
c. include collateral and capital.
d. all of these.

42. External sources of information include .

a. industry association credit files.
b. a credit application, including references.
c. information from employees.
d. all of these.

43. says to consider subcontracting business activities to outside vendors

if they can provide the services more cheaply and competently.
a. The Principle of Comparative Advantage
b. The Principle of Diversification
c. The Principle of Capital Market Efficiency
d. The Principle of Risk-Return Trade-off

44. says to use common industry practices provide a starting place for
operating efficiently.
a. The Behavioral Principle
b. The Principle of Incremental Benefits
c. The Principle of Self-Interested Behavior
d. The Principle of Valuable Ideas

45. Which of the following statements is false?

a. The invoice is a written statement about goods that were ordered, along with their
prices and the payment dates.
b. For the 4/10, net 40 credit terms, you are offering a total credit period of 40 days
from the date of the invoice, a discount period of 10 days, and a 4% discount if paid on
or before the discount period expires.
c. When a firm is using invoice billing, the invoice that accompanies shipment is a
separate bill to be paid.
d. none of these

46. Letters of credit frequently are used in .

a. international trade.
b. domestic trade.
c. credit trade.
d. none of these

47. When terms specified in the letter of credit are met, such as delivery of the
goods, the bank will make payment .
 a. to the customer.
b. on behalf of the customer.
c. on behalf of the supplier.
d. none of these

48. Which of the following statements is false?

a. Consignment is an agreement where a financial institution (a bank or other
financially strong party) substitutes its creditworthiness for that of the customer.
b. The supplier can require a letter of credit when the payment risk is high.
c. Although seasonal dating does give buyers a longer time to pay, sellers benefit by
encouraging buyers to make earlier purchase decisions.
d. none of these

49. Which of the following statements is true?

a. The "dating 100" or the "60 extra" mean that the clock does not start until 60
days after the invoice date.
b. Prox or proximate refers to the previous month.
c. Invoices with "10th prox" must be paid by the 10th of the next month.
d. none of these

50. Credit-policy decisions involve all aspects of receivables management. The

decision includes which of the following?
a. setting evaluation methods and credit standards
b. the choice of credit terms
c. monitoring receivables and taking actions for slow payment
d. all of these

III. Multiple Choice (Problems)

51. Silver, Inc. has a customer who wants to purchase $35,500 of goods on credit.
Silver estimates that the customer has a 97% probability of paying the $35,500 in 2
months and a 3% probability of a complete default (paying no cash at all). Assume an
investment of 90% of the amount, made at the time of the sale, and a required return of
10% APY. What is the credit sale?

a. $31,950
b. $32,050
c. $32,450
d. $33.500

52. Maxwell Corporation has a customer who wants to purchase $50,000 of goods
on credit. Maxwell estimates that the customer has a 97% probability of paying the
$50,000 in 4 months and a 3% probability of a complete default (paying no cash at all).
Assume an investment of 85% of the amount, made at the time of the sale, and a
required return of 10% APY. What is the NPV of granting credit?

a. about $4,580.00
b. about $4,500.37
c. about $4,483.37
d. about $4,464.00

53. Maxwell Corporation has a customer who wants to purchase $50,000 of goods on
credit. Maxwell estimates that the customer has a 97% probability of paying the $50,000
in 4 months and a 3% probability of a complete default (paying no cash at all). Assume
an investment of 85% of the amount, made at the time of the sale, and a required return
of 10% APY. What is the indifference payment probability (p*)?

a. about 87.01%
b. about 87.33%
c. about 87.75%
d. about 87.99%

54. Maxwell Corporation has a customer who wants to purchase $50,000 of goods on
credit. Maxwell estimates that the customer has a 97% probability of paying the $50,000
in 4 months and a 3% probability of a complete default (paying no cash at all). Maxwell
assumes an investment of 85% of the amount, made at the time of the sale, and a
required return of 10% APY. Based on these numbers Maxwell estimates the NPV to be
$4,483.37. What if Maxwell is wrong and it takes the customer 6 months to pay. Will the
NPV still be positive?

a. Yes, the NPV will be about $3,742.94.

b. Yes, the NPV will be about $4,742.94.
c. Yes, the NPV will be greater than $4,742.94.
d. No, the NPV will be negative.

55. Silver Corporation has a customer who wants to purchase $50,000 of goods on
credit. Silver estimates that the customer has a 97% probability of paying the $50,000 in
4 months and a 3% probability of a complete default (paying no cash at all). Silver
assumes an investment of 85% of the amount, made at the time of the sale, and a
required return of 10% APY. Based on these numbers Silver estimates the NPV to be
$4,483.37. What if Silver is wrong and the customer has a 13% probability of default. Will
the NPV still be positive?

a. Yes, the NPV will be positive.

b. We cannot tell.
c. We are indifferent because the NPV is zero and p* is 87%.
d. No, the NPV will be negative.
56. In the original month (t), you collect 20% of your sales. In month t + 1, you
collect 40% of your sales. In month t + 2, you collect 30%. In month t + 4, you collect
10%. January is your original month. Which of the following statements is true?

a. The balance fraction for March is 0.6.

b. The balance fraction for month t + 2 is 0.9.
c. The collection fraction in March is greater than any other collection fraction.
d. The balance fraction for April is 0.

57. Your receivables in December from the previous month are $11,920. The
collections in January from the two previous months are $10,320. What are your
receivables in January for the two previous months?

a. $1,600
b. $10,320.
c. $11,920
d. cannot tell

58. A firm currently uses credit terms of net 35 with no discounts allowed. It has
sales of $2M (M = million), cost of sales (at t = 0) of $1.3M. On average, 97% of
customers pay in 2 months, while 3% of customers never pay. At a required return of 1%
per month, what is the NPV of one year’s sales under the current policy?

a. about $611,380
b. about $621,380
c. about $631,380
d. about $641,380

59. A firm currently uses credit terms of net 30 with no discounts allowed. Current
sales are $1M (M = million) with $0.6M in cost of goods sold. It is considering a switch to
2/10, net 30. The proposed policy results in a 5% increase in sales and cost of goods
sold. On average, 70% of customers pay early and take the 2% discount. The balance of
the customers who pay, 29% of sales, pay in 1.5 months. What is the NPV of the
proposed policy?

a. about $336,714
b. about $356,714
c. about $386,714
d. none of these

60. Suppose Office Supply Corporation sells personal copying machines at the rate
of 900 units per year. The cost of placing one order is $225, and it costs $50 per year to
carry a copier in inventory. What is Office Supply’s EOQ?
a. about 88 copiers.
b. about 90 copiers.
c. about 92 copiers.
d. about 94 copiers

61. Suppose Office Supply Corporation sells personal copying machines at the rate
of 900 units per year. The cost of placing one order is $225, and it costs $50 per year to
carry a copier in inventory. Which of the below statements is false?

a. The number of orders per year is 10 and the time interval between orders is 36.5
days.
b. The annual ordering cost and the annual carrying cost are both $2,250.
c. The average inventory is 45 copiers and the total annual cost is $4,500.
d. all of these

62. Suppose Office Supply Corporation sells personal copying machines at the rate
of 900 units per year. The cost of placing one order is $225, and it costs $50 per year to
carry a copier in inventory. Office Supply’s EOQ is 90. The dealer now offers a quantity
discount of $1 per unit for orders of 150 or more. Should Office Supply order 150 each
time to get the discount?

a. No, the costs are now greater.

b. Yes, the costs have decreased by $100.
c. Yes, the costs have decreased by $300.
d. Yes, the costs have decreased by $600

63. Oxford Arms sells bullet-proof vests through mail orders. Oxford sells 5,000
vests per year, with a fixed cost of $60 per order, and a carrying cost of $15 per unit
average inventory. Oxford’s EOQ is 200 vests. This order quantity implies S/Q = 5,000 /
200 = 25 orders per year and an ordering cost of (S / Q)F = $25(60) = $1,500 per year.
.Adding the first 15 units to the safety stock reduces the expected stockout cost by $500.
How much do Oxford’s total costs decrease by adding 5 units of safety stock?

a. $500
b. $400
c. $275
d. $225

64. In the original month (t), you collect 20% of your sales. In month t + 1, you
collect 40% of your sales. In month t + 2, you collect 30%. In month t + 4, you collect
10%. January is your original month. Which of the following statements is true?

a. The balance fraction for March is 0.6.

b. The collection fraction for month t + 1 is 0.4.
c. The collection fraction in January is greater than any other collection fraction.
d. The balance fraction for April is 1.

65. A firm currently uses credit terms of net 30. It is considering a switch to 2/10, net
30. The expected effects of this more liberal policy are:

Which of the below statements is false?

a. At a required return of 1% per month, the NPV of one year’s sales under the current
policy is: NPV (current policy) = [(1 – 0.15)($1M) / (1 + 0.01)1.5] – $0.6M = [$0.985M /
(1.01)1.5] – $0.6M = $970,408– $600,000 = $370,408.
b. NPV (proposed policy) = [0.7(1 – 0.02)(1 + 0.05)$1M / (1 + 0.01)0.5] +
[0.29(1 + 0.05)$M) / (1 + 0.01)1.5] – $0.63M = $716,725 + $299,989 – $630,000 =
$386,714.
c. Because the proposed policy has the greater NPV ($386,714 versus $370,408), the
firm would be better off with the proposed change in credit policy.
d. all of these

66. A firm currently uses credit terms of net 30 with no discounts allowed. Current
sales are $2M (M = million) with $1.2M in cost of goods sold. It is considering a switch to
2/10, net 30. The proposed policy results in a 5% increase in sales and cost of goods
sold. On average, 70% of customers pay early and take the 2% discount. The balance of
the customers who pay, 29% of sales, pay in 1.5 months. What is the NPV of the
proposed policy?

a. about $773,428
b. about $793,428
c. about $873,428
d. none of these
67. A firm currently uses credit terms of net 30 with no discounts allowed. It has
sales of $1M (M = million), cost of sales (at t = 0) of $0.6M. On average, 98.5% of
customers pay in 1.5 months, while 1.5% of customers never pay. Its required rate of
return is 1% per month. What is the NPV of one year’s sales under the current policy?

a. about $385,000
b. about $370,407
c. about $350,000
d. about $340,511

68. 57. Your receivables in June from the previous month are $22,920. The
collections in July from the two previous months are $20,320. What are your receivables
in July for the two previous months?

a. $2,400
b. $2,500
c. $2,600
d. $2,700

69. In the original month (t), you collect 20% of your sales. In month t + 1, you
collect 40% of your sales. In month t + 2, you collect 30%. In month t + 4, you collect
10%. January is your original month. Which of the following statements is true?

a. The balance fraction for March is 0.4.

b. The balance fraction for month t + 2 is 0.9.
c. The collection fraction in February is greater than any other collection fraction.
d. The balance fraction for April is 0.1.
CHAPTER 14 (ACCOUNTS RECEIVABLE AND INVENTORY MANAGEMENT)

1. Firms generally choose to finance temporary assets with short-term debt

because

a. Matching the maturities of assets and liabilities reduces risk.

b. Short-term interest rates have traditionally been more stable than
long-term interest rates.
c. A firm that borrows heavily long-term is more apt to be unable to repay
the debt than a firm that borrows heavily short-term.
d. The yield curve has traditionally been downward sloping.
e. Sales remain constant over the year, and financing requirements also
remain constant

2. Which of the following statements is most correct?

a. Permanent current assets are those current assets that must be increased when sales
increase during an upswing.
b. Temporary current assets are those current assets on hand at the low point of the
business cycle.
c. Maturity matching is considered an aggressive financing policy.
d. An aggressive current asset financing policy uses a minimum amount of short-term
debt.
e. None of the statements above is correct.

3. Which of the following statements concerning commercial paper is incorrect?

a. Commercial paper is generally written for terms less than 270 days.
b. Commercial paper generally carries an interest rate below the prime rate.
c. Commercial paper is sold to money market mutual funds, as well as to
other financial institutions and nonfinancial corporations.
d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the
going interest rate.
e. Commercial paper is a type of unsecured promissory note issued by
large, strong firms.

4. Which of the following statements is most correct?

a. Trade credit is provided to a business only when purchases are made.

b. Commercial paper is a form of short-term financing that is primarily used by large,
financially stable companies.
c. Short-term debt, while often cheaper than long-term debt, exposes a firm to the
potential problems associated with rolling over loans.
d. Statements b and c are correct.
e. All of the statements above are correct.

5. Which of the following statements is incorrect?

a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the
going interest rate.
b. Accrued liabilities represent a source of “free” financing in the sense that no explicit
interest is paid on these funds.
c. A conservative approach to working capital will result in all permanent assets being
financed using long-term securities.
d. The risk to the firm of borrowing with short-term credit is usually greater than with
long-term debt. Added risk can stem from greater variability of interest costs on
short-term debt.
e. Trade credit is often the largest source of short-term credit.

6. Ski Lifts Inc. is a highly seasonal business. The following summary balance
sheet provides data for peak and off-peak seasons (in thousands of dollars):

From this data we may conclude that

a. Ski Lifts has a working capital financing policy of exactly matching asset and liability
maturities.
b. Ski Lifts’ working capital financing policy is relatively aggressive; that is, the company
finances some of its permanent assets with short term discretionary debt.
c. Ski Lifts follows a relatively conservative approach to working capital financing; that is,
some of its short-term needs are met by permanent capital.
d. Without income statement data, we cannot determine the aggressiveness or
conservatism of the company’s working capital financing policy.
e. Statements a and c are correct.

7. Which of the following statements is most correct?

a. Net working capital may be defined as current assets minus current liabilities. Any
increase in the current ratio will automatically lead to an increase in net working capital.
b. Although short-term interest rates have historically averaged less than long-term
rates, the heavy use of short-term debt is considered to be an aggressive strategy
because of the inherent risks of using short term financing.
c. If a company follows a policy of “matching maturities,” this means that it matches its
use of common stock with its use of long-term debt as opposed to short-term debt.
d. All of the statements above are correct.
e. None of the statements above is correct.

8. Which of the following statements is most correct?

a. Accrued liabilities are an expensive way to finance working capital.

b. A conservative financing policy is one in which the firm finances all of its fixed assets
with long-term capital and part of its permanent current assets with short-term,
nonspontaneous credit.
c. If a company receives trade credit under the terms 2/10 net 30, this implies the
company has 10 days of free trade credit.
d. Statements a and b are correct.
e. None of the answers above is correct.

9. Which of the following statements is most correct?

a. Under normal conditions, a firm’s expected ROE would probably be higher if it

financed with short-term rather than with long-term debt, but the use of short-term debt
would probably increase the firm’s risk.
b. Conservative firms generally use no short-term debt and thus have zero current
liabilities.
c. A short-term loan can usually be obtained more quickly than a long-term loan, but the
cost of short-term debt is likely to be higher than that of long-term debt.
d. If a firm that can borrow from its bank buys on terms of 2/10, net 30, and if it must pay
by Day 30 or else be cut off, then we would expect to see zero accounts payable on its
balance sheet.
e. If one of your firm’s customers is “stretching” its accounts payable, this may be a
nuisance but does not represent a real financial cost to your firm as long as the firm
periodically pays off its entire balance.

10. Which of the following statements is most correct?

a. Under normal conditions the shape of the yield curve implies that the interest cost of
short-term debt is greater than that of long-term debt, although short-term debt has other
advantages that make it desirable as a financing source.
b. Flexibility is an advantage of short-term credit but this is somewhat offset by the
higher flotation costs associated with the need to repeatedly renew short-term credit.
 c. A short-term loan can usually be obtained more quickly than a long-term loan but the
penalty for early repayment of a short-term loan is significantly higher than for a
long-term loan.
d. Statements about the flexibility, cost, and riskiness of short-term versus long-term
credit are dependent on the type of credit that is actually used.
e. Short-term debt is often less costly than long-term debt and the major reason for this
is that short-term debt exposes the borrowing firm to much less risk than long-term debt.

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

a. Convenience of location.
b. Competitive cost of services provided.
c. Size of the bank’s deposits.
d. Experience of personnel.
e. Loyalty and willingness to assume lending risks.

Multiple Choice: Problems

12. Wildthing Amusement Company’s total assets fluctuate between $320,000 and
$410,000, while its fixed assets remain constant at $260,000. If the firm
follows a maturity matching or moderate working capital financing policy, what is the
likely level of its long-term financing?

a. $ 90,000
b. $260,000
c. $350,000
d. $410,000
e. $320,000

13. A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take
the discount, and it pays after 67 days. What is the nominal annual cost of not taking the
discount? (Assume a 365-day year.)

a. 21.71%
b. 22.07%
c. 22.95%
d. 23.48%
e. 24.52%

14. Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts,
and it typically pays 35 days after the invoice date. Net purchases amount to $720,000
per year. What is the nominal annual cost of its non-free trade credit? (Assume a
365-day year.)
a. 17.2%
b. 23.6%
c. 26.1%
d. 37.2%
e. 50.6%

15. Your company has been offered credit terms on its purchases of 4/30, net 90
days. What will be the nominal annual cost of trade credit if your company pays on the
35th day after receiving the invoice? (Assume a 365-day year.)

a. 30%
b. 304%
c. 3%
d. 87%
e. 156%

16. Phillips Glass Company buys on terms of 2/15, net 30 days. It does not take
discounts, and it typically pays 30 days after the invoice date. Net purchases amount to
$730,000 per year. On average, how much “free” trade credit does Phillips receive
during the year? (Assume a 365-day year.)

a. $30,000
b. $40,000
c. $50,000
d. $60,000
e. $70,000

17. HBC Inc. buys on terms of 2/10, net 30 days. It does not take discounts, and it
typically pays 30 days after the invoice date. Net purchases amount to $1,750,000 per
year. On average, how much “free” trade credit does HBC receive during the year?
(Assume a 365-day year.)

a. $25,293.45
b. $47,945.21
c. $68,651.33
d. $75,000.00
e. $95,890.42

18. Coverall Carpets 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, 1-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%

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

a. $111,000
b. $100,000
c. $112,360
d. $ 89,000
e. $108,840

20. Viking Farms 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?

a. $61,856
b. $67,531
c. $60,000
d. $68,182
e. $67,423

21. Inland Oil arranged a $10,000,000 revolving credit agreement with a group of
small banks. The firm paid an annual commitment fee of one-half of one percent of the
unused balance of the loan commitment. On the used portion of the loan, Inland paid 1.5
percent above prime for the funds actually borrowed on an annual, simple interest basis.
The prime rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately
after the agreement was signed and repaid the loan at the end of one year, what was the
total dollar cost of the loan agreement for one year?

a. $560,000
b. $650,000
c. $540,000
d. $900,000
e. $675,000
22. Your firm buys on credit terms of 2/10, net 45 days, and it always pays on Day
45. If you calculate that this policy effectively costs your firm $159,621 each year, what is
the firm’s average accounts payable balance? (Hint: Use the nominal cost of trade credit
and carry its cost out to 6 decimal places.)

a. $1,234,000
b. $ 75,000
c. $ 157,500
d. $ 625,000
e. $ 750,000

23. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30
days. Out of convenience, your firm is not taking discounts, but is paying after 20 days,
instead of waiting until Day 30. You point out that the nominal cost of not taking the
discount and paying on Day 30 is approximately 37 percent. But since your firm is not
taking discounts and is paying on Day 20, what is the effective annual cost of your firm’s
current practice, using a 365-day year?

a. 36.7%
b. 105.4%
c. 73.4%
d. 43.6%
e. 109.0%

24. Hayes Hypermarket purchases $4,562,500 in goods over a 1-year period from
its sole supplier. The supplier offers trade credit under the following terms: 2/15, net 50
days. If Hayes chooses to pay on time but not to take the discount, what is the average
level of the company’s accounts payable, and what is the effective annual cost of its
trade credit? (Assume a 365- day year.)

a. $208,333; 17.81%
b. $416,667; 17.54%
c. $416,667; 27.43%
d. $625,000; 17.54%
e. $625,000; 23.45%

25. A firm is offered trade credit terms of 3/15, net 30 days. The firm does not take
the discount, and it pays after 50 days. What is the effective annual cost of not taking
this discount? (Assume a 365-day year.)

a. 44.30%
b. 32.25%
c. 30.00%
d. 37.39%
e. 45.50%

26. A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the
discount, and it pays after 58 days. What is the effective annual cost of not taking this
discount? (Assume a 365-day year.)

a. 21.63%
b. 13.35%
c. 14.90%
d. 15.89%
e. 18.70%

27. Coverall Carpets 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, 1-year
installment loan, payable in 4 equal quarterly payments. What is the effective rate of
interest on the 12 percent discount loan?

a. 10.7%
b. 12.0%
c. 12.5%
d. 13.6%
e. 14.1%

28. Suppose you 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%

29. Wentworth Greenery harvests its crop four times annually and receives
payment 90 days after it is picked and shipped. However, the firm must plant, irrigate,
and harvest on a near 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?

a. 11.00%
b. 15.94%
c. 11.46%
d. 13.75%
e. 12.72%

30. Matheson Manufacturing 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,
1-year installment loan, payable in 4 equal quarterly payments. What is the effective rate
of interest on the 10.19 percent add-on loan?

a. 9.50%
b. 10.19%
c. 15.22%
d. 16.99%
e. 22.05%

31. XYZ Company 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?

a. 16.22%
b. 17.97%
c. 17.48%
d. 18.67%
e. 18.00%

32. First National Bank of Micanopy has offered you the following loan alternatives
in response to your request for a $75,000, 1-year loan.

Alternative 1: 7 percent discount interest, with a 10 percent compensating balance.

Alternative 2: 8 percent simple interest, with interest paid monthly.

What is the effective annual rate on the cheaper loan?

a. 8.00%
b. 7.23%
c. 7.67%
d. 8.43%
e. 8.30%

33. The Lasser Company needs to finance an increase in its working capital for the
coming year. Lasser is reviewing the following three options: (1) The firm can
borrow from its bank on a simple interest basis for one year at 13 percent. (2) It can
borrow on a 3-month, but renewable, loan at a 12 percent nominal rate. The loan is a
simple interest loan, completely paid off at the end of each quarter, then renewed for
another quarter. (3) The firm can increase its accounts payable by not taking discounts.
Lasser buys on credit terms of 1/30, net 60 days. What is the effective annual cost (not
the nominal cost) of the least expensive type of credit, assuming 360 days per year?

a. 13.00%
b. 12.82%
c. 11.46%
d. 12.12%
e. 12.55%

34. You need to borrow $25,000 for one year. Your 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?

a. 1.12%
b. 2.48%
c. 3.60%
d. 4.25%
e. 5.00%

35. Phranklin Pharms Inc. purchases merchandise from a company that gives
sales terms of 2/15, net 40 days. Phranklin Pharms has gross purchases of $819,388
per year. What is the maximum amount of costly trade credit Phranklin could get,
assuming it abides by the supplier’s credit terms? (Assume a 365-day year.)

a. $88,000
b. $33,000
c. $55,000
d. $50,000
e. $44,000

36. C+ Notes’ business is booming, and it needs to raise more capital. The
company purchases supplies from a single supplier on terms of 1/10, net 20 days, and it
currently takes the discount. One way of getting the needed funds would be to forgo the
discount, and C+’s owner believes she could delay payment to 40 days without adverse
effects. What is the effective annual rate of stretching the accounts payable?

a. 10.00%
b. 11.11%
c. 11.75%
d. 12.29%
e. 13.01%

37. Wicker Corporation is determining whether to support $100,000 of its

permanent current assets with a bank note or a short-term bond. The firm’s bank offers
a two-year note for which the firm will receive $100,000 and repay $118,810 at the end
of two years. The firm has the option to renew the loan at market rates. Alternatively,
Wicker can sell 8.5 percent annual coupon bonds with a 2-year maturity and $1,000 par
value at a price of $973.97. How many percentage points lower is the interest rate on the
less expensive debt instrument?

a. 0.0%
b. 1.2%
c. 1.0%
d. 1.8%
e. 0.6%

38. Dalrymple Grocers buys on credit terms of 2/10, net 30 days, and it always pays
on the 30th day. Dalrymple calculates that its annual costly trade credit is $375,000.
What is the firm’s average accounts payable balance? Assume a 365-day year.

a. $187,475
b. $374,951
c. $223,333
d. $562,426
e. $457,443

39. Quickbow Company currently uses maximum trade credit by not taking
discounts on its purchases. Quickbow is considering borrowing from its bank, using
notes payable, in order to take trade discounts. The firm wants to determine the effect of
this policy change on its net income. The standard industry credit terms offered by all its
suppliers are 2/10, net 30 days, and Quickbow pays in 30 days. Its net purchases are
$11,760 per day, using a 365-day year. The interest rate on the notes payable is 10
percent and the firm’s tax rate is 40 percent. If the firm implements the plan, what is the
expected change in Quickbow’s net income?

a. -$23,520
b. -$31,440
c. +$23,520
d. +$38,448
e. +$69,888

40. Leiner Corp. is a retailer that finances its purchases with trade credit under the
following terms: 1/10, net 30 days. The company plans to take advantage of the free
trade credit that is offered. After all the free trade credit is used, the company can either
finance the clothing purchases with a bank loan that has an effective rate of 10.1349
percent (on a 365-day year), or the firm can continue to use trade credit.

The company has an understanding with its suppliers that within moderation, it is all right
to “stretch out” its payments beyond 30 days without facing any additional financing
costs. Therefore, the longer it takes the company to pay its suppliers, the lower the cost
of trade credit. How many days would the firm wait to pay its suppliers in order for the
cost of the trade credit to equal the cost of the bank loan?

a. 30 days
b. 36 days
c. 40 days
d. 46 days
e. 48 days

41. Judy’s Fashions Inc. purchases supplies from a single supplier on terms of 1/10, net
20. Currently, Judy 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. Judy 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. Judy 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 Judy would otherwise keep in the account. Which of the following
statements is most correct?

a. The nominal cost of using additional trade credit is 36 percent.

b. Considering only the explicit costs, Judy should finance the expansion with the bank
loan.
c. The cost of expanding trade credit using the nominal formula is less than the cost of
the bank loan. However, the true cost of the trade credit when compounding is
considered is greater than the cost of the bank loan.
d. The effective cost of the bank loan is decreased from 17.65 percent to 15.38 percent
because Judy would hold a cash balance of one-half the compensating balance amount
even if the loan were not taken.
e. If Judy had transaction balances that exceeded the compensating balance
requirement, the effective cost of the bank loan would be 12.00 percent.

(The following data apply to the next two problems.)

You have just taken out a loan for $75,000. The stated (simple) interest rate on this loan
is 10 percent, and the bank requires you to maintain a compensating balance equal to
15 percent of the initial face amount of the loan. You currently have $20,000 in your
checking account, and you plan to maintain this balance. The loan is an add-on
installment loan that you will repay in 12 equal monthly installments, beginning at the
end of the first month.

42. How large are your monthly payments?

a. $6,250
b. $7,000
c. $7,500
d. $5,250
e. $6,875

43. What is the nominal annual add-on interest rate on this loan?

a. 10.00%
b. 16.47%
c. 18.83%
d. 20.00%
e. 24.00%