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Bài test tiếng Anh ngành ngân hàng và đáp án phần 14

Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
1. The appropriate mix of current assets is not a working capital management decision.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
2. Net working capital is important because it is a measure of liquidity and represents the
net short-term investment the firm keeps in the business.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
3. Working capital management involves making decisions regarding the use and sources
of current assets.
A) True

B) False
Ans: A
Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
4. Working capital efficiency refers to the length of time it takes for a firm to convert the
raw material to a finished product.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
5. Liquidity is the ability of a company to convert assets—real or financial—into cash
quickly without suffering a financial loss.
A) True
B) False
Ans: A
Page 1


Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
6. The operating cycle begins when the firm uses its cash to purchase raw materials and
ends when the firm collects cash payments on its credit sales.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
7. The cash conversion cycle is the length of time between the cash outflow for materials
and the cash inflow from sales.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy


8. Days' payables outstanding (DPO), which tells how long a firm takes to pay off its
suppliers for the cost of inventory, is used to measure the operating cycle.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
9. Days' payables outstanding (DPO) tells how long a firm takes to pay off its suppliers
for the cost of inventory.
A) True
B) False
Ans: A

Page 2


Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
10. An efficient firm with good working capital management should have a high average
collection period compared to its industry.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
11. The flexible strategy calls for management to invest large amounts in cash, marketable
securities, and inventory.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
12. The flexible strategy is perceived be a high-risk and low-return course of action for
management to follow.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
13. The restrictive strategy is a high-risk, high-return alternative to the flexible strategy.
A) True
B) False
Ans: A

Page 3


Format: True/False
Learning Objective: LO 5
Level of Difficulty: Easy
14. The conflict between carrying costs versus shortage costs is called the working capital
trade-off.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
15. If shortage costs dominate carrying costs, the firm will need to move toward a more
flexible policy.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
16. If carrying costs are less than shortage costs, then the firm will maximize value by
adopting a more restrictive strategy.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 4
Level of Difficulty: Medium
17. Trade credit, which is short-term financing, comes with an explicit interest charge.
A) True
B) False
Ans: B

Page 4


Format: True/False
Learning Objective: LO 4
Level of Difficulty: Medium
18. An offer of 3/10, net 40 means that the selling firm offers a 10 percent discount if the
buyer pays the full amount of the purchase in cash within 3 days of the invoice date.
Otherwise, the buyer has 40 days to pay the balance in full from the date of delivery.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
19. Trade credit is a cheap loan from the supplier.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
20. The aging schedule shows the breakdown of the firm's accounts receivable by their date
of sale.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 5
Level of Difficulty: Easy
21. A firm that employs just-in-time management has to increase its investment in working
capital.
A) True
B) False
Ans: B

Page 5


Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
22. Float is the time taken by a credit customer to pay the firm.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
23. A lockbox system allows geographically dispersed customers to send their payments to
a post office box close to them.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 7
Level of Difficulty: Easy
24. Under the maturity matching strategy, a firm funds all seasonal demands with shortterm borrowing.
A) True
B) False
Ans: A
Format: True/False
Learning Objective: LO 7
Level of Difficulty: Easy
25. Short term funding strategy calls for all working capital and a portion of fixed assets to
be funded with short-term debt.
A) True
B) False
Ans: A

Page 6


Format: True/False
Learning Objective: LO 7
Level of Difficulty: Medium
26. An informal line of credit is short term debt promissory notes issued by large financial
firms.
A) True
B) False
Ans: B
Format: True/False
Learning Objective: LO 7
Level of Difficulty: Medium
27. A factor is an individual or financial institution that buys accounts receivable
without recourse.
A) True
B) False
Ans A
:
Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: Medium
28. Which one of the following statements is NOT true?
A) Gross working capital is the funds invested in a company's current liabilities.
B) Net working capital (NWC) refers to the difference between current assets and current
liabilities.
C) Working capital efficiency refers to the length of time between when a working capital
asset is acquired and when it is converted into cash.
D) Working capital management involves making decisions regarding the use and sources of
current assets.
Ans: A

Page 7


Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: Medium
29. Which one of the following statements is NOT true?
A) The higher the cash balance, the better the ability of the firm to meet its short-term
financial obligations.
B) The lower the cash balance, the better the ability of the firm to meet its short-term
financial obligations.
C) The level of the cash balance has no bearing on the firm's ability to meet its short-term
financial obligations.
D) None of the above.
Ans: B
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
30. The cash conversion cycle
A) shows how long the firm keeps its inventory before selling it.
B) begins when the firm invests cash to purchase the raw materials that would be used to
produce the goods that the firm manufactures.
C) begins when the firm uses its cash to purchase raw materials and ends when the firm
collects cash payments on its credit sales.
D) estimates how long it takes on average for the firm to collect its outstanding accounts
receivable balance.
Ans: B
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
31. Which one of the following statements is NOT true?
A) The cash conversion cycle begins when the firm invests cash to purchase the raw
materials that would be used to produce the goods that the firm manufactures.
B) The cash conversion cycle begins when the firm uses its cash to purchase raw materials
and ends when the firm collects cash payments on its credit sales.
C) To measure the cash conversion cycle, we need another measure called the days' payables
outstanding.
D) The cash conversion cycle ends not with the finished goods being sold to customers and
the cash collected on the sales; but when you take into account the time taken by the firm
to pay for its purchases.
Ans: B

Page 8


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
32. The operating cycle
A) begins when the firm receives the raw materials it purchased that would be used to
produce the goods that the firm manufactures.
B) begins when the firm uses its cash to purchase raw materials and ends when the firm
collects cash payments on its credit sales.
C) To measure operating cycle we need another measure called the days' payables
outstanding.
D) ends not with the finished goods being sold to customers and the cash collected on the
sales; but when you take into account the time taken by the firm to pay for its purchases.
Ans: A
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
33. Which ONE of the following statements is true when managing working capital
accounts?
A) Maintain minimal raw material inventories without causing manufacturing delays.
B) Use as little labor as possible to manufacture the product while producing a quality
product.
C) Delay paying accounts payable as long as possible without suffering any penalties.
D) All of the above are true.
Ans: D
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
34. Which ONE of the following statements is true?
Cash conversion cycle = DSO + DSI + DPO
A)
B)

Cash conversion cycle = DSO + DSI − DPO

C)

Cash conversion cycle = DSO − DPO

D) None of the above.
Ans: B

Page 9


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
35. Which one of the following statements is NOT true?
Cash conversion cycle = DSO + DSI − DPO
A)
B)

Operating cycle = DSO + DSI

C) a and b
D) None of the above
Ans: D
Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Easy
36. The flexible current asset investment strategy
A) has a high percent of current assets to sales.
B) calls for management to invest large amounts in cash, marketable securities, and
inventory.
C) leads to high levels of accounts receivable.
D) All of the above.
Ans: D
Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Medium
37. Which one of the following is NOT true about the flexible current asset investment
strategy?
A) The strategy promotes a liberal trade credit policy for customers.
B) The flexible strategy calls for management to invest large amounts in cash, marketable
securities, and inventory.
C) The flexible strategy is perceived be a high-risk and high-return course of action for
management to follow.
D) The strategy's downside is the high inventory carrying cost.
Ans: C

Page 10


Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Easy
38. A restrictive current asset investment strategy calls for
A) current assets kept to a minimum.
B) the firm barely investing in cash and inventory.
C) tight terms of sale intended to curb credit sales and accounts receivable.
D) All of the above
Ans: D
Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Easy
39. The restrictive strategy is a high-risk, high-return alternative to the flexible strategy
because of
A) financial shortage costs.
B) production shortage costs.
C) human resources shortages costs.
D) None of the above.
Ans: A
Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Medium
40. Which ONE of the following statements is true?
A) Financial shortage costs arise mainly from illiquidity—shortage of cash or a lack of
marketable securities to sell for cash.
B) Operating shortage costs result from lost production and sales.
C) Operating shortage costs can be substantial, especially if the product markets are
competitive.
D) All of the above.
Ans: D
Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Easy
41. Operating shortage costs that result from lost production and sales are caused by
A) not holding enough raw materials in inventory.
B) running out of finished goods.
C) restrictive sale policies.
D) All of the above.
Ans: D

Page 11


Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Medium
42. Which ONE of the following statements about working capital tradeoff is true?
A) Financial managers need to balance shortage costs against carrying costs to find an
optimal strategy.
B) If carrying costs are larger than shortage costs, then the firm will maximize value by
adopting a more restrictive strategy.
C) If shortage costs dominate carrying costs, the firm will need to move toward a more
flexible policy.
D) All of the above
Ans: D
Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Medium
43. Which one of the following statements about working capital trade-off is NOT true?
A) Financial managers need to balance shortage costs against carrying costs to find an
optimal strategy.
B) If carrying costs are smaller than shortage costs, then the firm will maximize value by
adopting a more restrictive strategy.
C) If shortage costs dominate carrying costs, the firm will need to move toward a more
flexible policy.
D) Management will try to find the level of current assets that minimizes the sum of the
carrying costs and shortage costs.
Ans: B
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Easy
44. The aging schedule
A) shows the breakdown of the firm's accounts receivable by their date of sale.
B) identifies and then tracks delinquent accounts and to see that they are paid.
C) are an important financial tool for analyzing the quality of a company's receivables.
D) All of the above.
Ans: D

Page 12


Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Easy
45. Which ONE of the following statements is true?
A) The economic order quantity (EOQ) mathematically determines the minimum total
inventory cost.
B) The EOQ takes into account reorder costs and inventory carrying costs.
C) The optimal order size is determined by the EOQ model.
D) All of the above
Ans: D
Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Medium
46. Which one of the following statements is NOT true?
A) The economic order quantity (EOQ) mathematically determines the minimum total
inventory cost.
B) The EOQ ignores reorder costs and inventory carrying costs.
C) The optimal order size is determined by the EOQ model.
D) All of the above.
Ans: B
Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Easy
47. Which one of the following statements about just-in-time inventory management policy
is NOT true?
A) It calls for the exact day-by-day, or even hour-by-hour raw material needs to be delivered
by the suppliers.
B) If the supplier fails to make the needed deliveries, then production shuts down.
C) A big disadvantage in this system is that there are high raw inventory costs.
D) It eliminates obsolescence or loss to theft.
Ans: C

Page 13


Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Medium
48. Which one of the following statements about collection time is NOT true?
A) Collection time, or float, is the time between when a customer makes a payment and
when the cash becomes available to the firm.
B) Collection time can be broken down into three components.
C) Delivery time or mailing time is not part of the float.
D) Processing delay is part of the collection time.
Ans: C
Format: Multiple Choice
Learning Objective: LO 7
Level of Difficulty: Medium
49. Which ONE of the following statements about matching maturity strategy is true?
A) All working capital is funded with short-term borrowing.
B) As the level of sales varies seasonally, short-term borrowing fluctuates between some
minimum and maximum level.
C) All fixed assets are funded with long-term financing.
D) All of the above.
Ans: D
Format: Multiple Choice
Learning Objective: LO 7
Level of Difficulty: Medium
50. Which ONE of the following statements about short term funding strategy is true?
A) All working capital and a portion of fixed assets are funded with short-term debt.
B) This strategy lowers the cost under some interest rate scenarios.
C) It forces the firm to continually refinance the funding of the long-term assets in a
changing interest rate environment.
D) All of the above.
Ans: D

Page 14


Format: Multiple Choice
Learning Objective: LO 7
Level of Difficulty: Medium
51. Which one of the following statements is NOT true?
A) Firms using matching maturity strategy fund all working capital needs with long-term
borrowing.
B) Long-term financing strategy relies on long-term debt to finance both capital assets and
working capital.
C) All working capital and a portion of fixed assets are funded with short-term debt when
firms use the aggressive funding strategy.
D) Firms using a matching maturity strategy fund all working capital needs with short-term
borrowing.
Ans: A
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Easy
52. Which one of the following statements is NOT true?
A) Accounts payable (trade credit), bank loans, and commercial paper are common sources
of short-term financing.
B) An informal line of credit is a verbal agreement between the firm and the bank, allowing
the firm to borrow up to an agreed-upon upper limit.
C) An informal line of credit is also known as “revolving credit.”
D) A formal line of credit is also known as “revolving credit.”
Ans: C
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
53. Operating cycle: Trend Foods distributes its products to more than 100 restaurants and
delis. The company's collection period is 32 days, and it keeps its inventory for 10 days.
What is Trend's operating cycle?
A) 22 days
B) 32 days
C) 42 days
D) None of the above.
Ans: C
Feedback:
DSI = 10 days
DSO = 32 days
Operating cycle = DSO + DSI
= 32 + 10
= 42 days

Page 15


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
54. Operating cycle: Stamp, Inc., has an operating cycle of 81 days and takes 47 days to
collect on its receivables. What is its level of inventory if the firm's cost of goods sold
is $312,455? Round to the nearest dollar.
A) $9,190
B) $14,685
C) $29,105
D) $69,339
Ans: C
Feedback:
Operating cycle = 81 days
DSO = 47 days
Cost of goods sold = $19,630
Operating cycle = DSO + DSI
DSI = OC – DSO = 81 – 47 = 34 days
Inventory
Inventory
Inventory
DSI = 34 days =
=
=
COGS 365 $312,455 365 $856.04
Inventory = 34 × 856.04 = $29,105.40

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
55. Operating cycle: Le Baron Company, a men's designer firm, has an operating cycle of
123 days. The firm's days' sales in inventory is 73 days. How much does the firm have
in receivables if it has credit sales of $433,450? Round to the nearest dollar.
A) $59,377
B) $71,252
C) $47,501
D) $64,233
Ans: A
Feedback:
Operating cycle = 123 days
DSI = 73 days
Operating cycle = DSO + DSI
DSO = OC – DSI = 123 – 73 = 50 days
Credit sales = $433,450
Accounts receivables Accounts receivables
DSO =
=
= 50 days
Credit sales 365
$433, 450 365
Accounts receivables = 50 × $1,187.53 = $59, 376.71

Page 16


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
56. Operating cycle: All Stars, Inc., has inventory of $44,233 and cost of goods sold of
$512,902. The company has an operating cycle of 74 days. What is the firm's days'
sales outstanding (DSO)?
A) 43 days
B) 32 days
C) 49 days
D) 26 days
Ans: A
Feedback:
Operating cycle = 74 days
Cost of goods sold = 212,902
Inventory = $44,233
Inventory
$44,233
DSI =
=
= 31.5 days
COGS 365 $512,902 365
Operating cycle = DSO + DSI
DSO = OC – DSI = 74 – 31.5 = 42.5 days
Use the following to answer questions 57-58:
You are provided the following working capital information for the Ridge Company:
Ridge Company
Account
$
Inventory
$12,890
Accounts
12,800
receivable
Accounts payable
12,670
Net sales
Cost of goods sold

$124,589
99,630

Page 17


Reference: Ref 14-1
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
57. Operating cycle: What is the operating cycle for Ridge Company?
A) 47 days
B) 85 days
C) 36 days
D) 51 days
Ans: B
Feedback:
Accounts receivables = $12,800
Accounts payables = $12,670
Net sales = $124,589
Inventory = $12,890
Cost of goods sold = $99,630

Page 18


Reference: Ref 14-1
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
58. Cash conversion cycle: What is the cash conversion cycle for Ridge Company?
A) 83.5 days
B) 38.3 days
C) 129.9 days
D) 46.4 days
Ans: B
Feedback:
Accounts receivables = $12,800
Accounts payables = $12,670
Net sales = $124,589
Inventory = $12,890
Cost of goods sold = $99,630

Page 19


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
59. Cash conversion cycle: Wolfgang Electricals estimates that it takes the company 31
days on average to pay off its suppliers. It also knows that it has days' sales in inventory
of 54 days and days sales' outstanding of 34 days. What is its cash conversion cycle?
A) 119 days
B) 34 days
C) 57 days
D) 46 days
Ans: C
Feedback:
Feedback for Question 57:
DPO = 31
DSI = 54
DSO = 34
Cash conversion cycle = DSO + DSI – DPO
=34 + 54 – 31 = 57
Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
60. Cash conversion cycle: Renald Corp. estimates that it takes the company 27 days on
average to pay off its suppliers. It also knows that it has days' sales in inventory of 43
days and days sales' outstanding of 45 days. What is its cash conversion cycle?
A) 61 days
B) 115 days
C) 57 days
D) 46 days
Ans: A
Feedback:
DPO = 27 days
DSI = 43 days
DSO = 45 days
Renald's cash conversion cycle =
Cash conversion cycle = DSO + DSI − DPO
= 45 + 43 − 27
= 61 days

Page 20


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
61. Cash conversion cycle: Your boss asks you to compute the company's cash conversion
cycle. Looking at the financial statements, you see that the average inventory for the
year was $126,300, accounts receivable were $97,900, and accounts payable were at
$115,100. You also see that the company had sales of $324,000 and that cost of goods
sold was $282,000. What is your firm's cash conversion cycle? Round to the nearest
day.
A) 119 days
B) 34 days
C) 57 days
D) 125 days
Ans: D
Feedback:
Accounts receivables = $97,900
Accounts payables = $115,100
Net sales = $324,000
Inventory = $126,300
Cost of goods sold = $282,000
Accounts receivables
$97,900
DSO =
=
= 110.3 days
Credit sales 365
$324, 000 365
DSI =

Inventory
$126,300
=
= 163.5 days
COGS 365 $282, 000 365

DPO =

Accounts payables
$115,100
=
= 149 days
COGS 365
$282, 000 365

Cash conversion cycle = DSO + DSI − DPO
= 110.3 + 163.5 − 149
= 124.8 days

Page 21


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Medium
62. Cash conversion cycle: West Handicrafts, Inc., has net sales of $423,000 with 30
percent of it being credit sales. Its cost of goods sold is $324,000. The firm's cash
conversion cycle is 47.9 days. The firm's operating cycle is 86.3 days. What is the
firm's accounts payable? Round to the nearest dollar
A) $34,087
B) $126,900
C) $71,203
D) $56,322
Ans: A
Feedback:
Net sales = $423,000
Credit sales = (0.3 x $423,000) = $126,900
Cash conversion cycle = 47.9 days
Operating cycle = 86.3 days
Cost of goods sold = $324,000
Cash conversion cycle = ( DSO + DSI ) − DPO
47.9 = 86.3 − DPO
DPO = 38.4 days
DPO =

Accounts payables Accounts payables
=
= 38.4 days
COGS 365
$324, 000 365

Accounts payables = 38.4 × $887.67 = $34, 086.53

The firm has accounts payables of $34,087.

Page 22


Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
63. Effective interest rate: Serengeti Travels has borrowed $50,000 at a stated APR of 8.5
percent. The loan calls for a compensating balance of 8 percent. What is the effective
interest rate for this company?
A) 9.24%
B) 8.50%
C) 8.00%
D) 16.50%
Ans: A
Feedback:
Amount to be borrowed = $50,000
Stated annual interest rate = 8.5%
Compensating balance = 8%
Amount deposited as compensating balance = $50,000 x 0.08 = $4,000
Effective borrowing amount = $50,000 – $4,000 = $46,000
Interest expense = $50,000 x 0.085 = $4,250
Interest expense
$4,250
Effective interest rate =
=
= 9.24%
Effective borrowing amount
$46,000

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
64. Effective interest rate: Sun Prairie Traders borrowed $63,000 at an APR of 10 percent.
The loan called for a compensating balance of 10 percent. What is the effective interest
rate on the loan?
A) 10.00%
B) 11.11%
C) 8.00%
D) 12.50%
Ans: B
Feedback:
Amount to be borrowed = $63,000
Stated annual interest rate = 10%
Compensating balance = 10%
Amount deposited as compensating balance = $63,000 x 0.10 = $6,300
Effective borrowing amount = $63,000 – $6,300 = $56,700
Interest expense = $63,000 x 0.10 = $6,300
Interest expense
$6,300
Effective interest rate =
=
= 11.11%
Effective borrowing amount
$56,700

Page 23


Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
65. Effective interest rate: Good Homes Furnishings is borrowing $225,000. The loan
requires a 10 percent compensating balance, and the effective interest rate on the loan is
8.25 percent. What is the stated APR on this loan? Round to one decimal place.
A) 10.00%
B) 11.11%
C) 7.4%
D) 8.25%
Ans: C
Feedback:
Amount to be borrowed = $225,000
Stated annual interest rate = ?
Compensating balance = 10%
Effective interest rate = 8.25%
Compensating balance = (0.10 x $225,000) = $22,500
Effective borrowed amount = $225,000 – $22,500 = $202,500
Interest expense
Effective interest rate =
Effective borrowing amount
Interest expense
8.25% =
$202,500
Interest expense = 0.0825 × $202,500 = $16, 706.25
Stated interest rate = $16,706.25 / $225,000 =7.425%

Page 24


Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
66. Effective interest rate: Maggie's Bistro is borrowing $375,000. The loan requires an 8
percent compensating balance, and the effective interest rate on the loan is 10.326
percent. What is the stated APR on this loan? Round to one decimal place.
A) 10.0%
B) 9.5%
C) 7.4%
D) 8.5%
Ans: B
Feedback:
Amount to be borrowed = $375,000
Stated annual interest rate = ?
Compensating balance = 8%
Effective interest rate = 10.326%
Compensating balance = (0.08 x $375,000) = $30,000
Effective borrowed amount = $375,000 – $30,000 = $345,000
Interest expense
Effective interest rate =
Effective borrowing amount
Interest expense
10.326% =
$345, 000
Interest expense = 0.10326 × $345, 000 = $35, 625
Stated interest rate = $35,625 / $375,000 =9.5%

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