Working Capital Management 2

Question 1

compensating balance

Answer 1

is one way that the actual cost of a loan exceeds the stated contractual rate

Question 2

A letter of credit

Answer 2

puts the lender’s credit behind that of the borrower to guarantee payment

Question 3

line of credit

Answer 3

is a prearranged borrowing limit

Question 4

four reasons for a firm to hold cash are

Answer 4

1) transactions to meet day to day cash outflows
2) compensating balances required by banks
3) precautionary balances to meet unexpected events
4) speculative balances to take advantage of opportunities

Question 5

what are advantages of short term debt over long term financing options

Answer 5

Flexibility
Cost
Speed that funds can be obtained

Question 6

Short term debt

Answer 6

is considered to be riskier than long term debt since it has to be either be paid off or refinanced on a regular basis.

If rates increase the cost of borrowing will increase

Question 7

Safety Stock formula

Answer 7

Usage per day x lead time

Question 8

Commercial paper facts

Answer 8

1) unsecured obligation issued by a corporation or bank to finance short-term credit needs
2) Maturities up to 270 days
3) are either discounted or interest-bearing
4) have limited or nonexistent secondary market
5) issued by companies with high credit ratings

Question 9

bankers’ acceptance

Answer 9

is a promissory note backed by a letter of credit that has become a money market security

Question 10

Just in time inventory goals

Answer 10

reduce inventory and its carrying costs

Question 11

With Just in time

Answer 11

the manufacturer subcontracts with suppliers to provide the necessary inputs for that day’s or week’s expected production.