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1. Gerontology Associates, a highly profitable company, is considering two growth strategies, one that will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over a 4-year time frame. Assuming Gerontology Associates uses the percent of sales method, which of the following statements is true?

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a. Discretionary financing needed will be much greater for the 4-year growth strategy.

b. Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.

c. The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.

d. Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company’s debt.

2. The cash budget represents a detailed plan of future cash flows.

a. True

b. False

3. Which of the following actions would improve a firm’s liquidity?

a. repurchasing stock

b. selling bonds and increasing cash

c. buying bonds

d. increasing the company’s dividend payments

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4. Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APY, or annual percentage yield, calculation?

a. 4.33%

b. 10.34%

c. 12.25%

d. 12.46%

5. Crawley, Inc. has a line of credit with HNC Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent. However, Crawley, Inc. must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank. Crawley, Inc. does not normally keep a cash balance account with HNC Bank. What is the effective annual cost of credit?

a. 12.40%

b. 12.83%

c. 14.63%

d. 15.47%

6. The risk-return trade-off in managing a firm’s working capital involves which of the following?

a. a trade-off between liquidity and activity

b. a trade-off between debt and equity

c. a trade-off between the firm’s liquidity and its profitability

d. none of the above

7. Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. How much will Brown Inc. need to borrow?

a. $270,000

b. $300,000

c. $312,500

d. $347,222

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8. The cash conversion cycle is a measure of a firm’s effectiveness in managing its working capital.

a. True

b. False

9. Blastdale Corp. is considering borrowing $15,000 for a 60-day period. The firm will repay the $15,000 principal amount plus $200 in interest. What is the effective annual rate of interest? Use a 360-day year.

a. 7.2%

b. 8.0%

c. 8.2%

d. 10.5%.

10. The Boyles Ceramics, Inc. established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent. A compensating balance averaging 25 percent of the amount borrowed is required. Prior to the agreement, Boyles had no deposit with the bank. Shortly after signing the agreement, Boyles needed $240,000 to pay off a note that was due. It borrowed the $240,000 from the bank by drawing on the line of credit. What is the effective annual cost of credit?

a. 12.50%.

b. 11.11%.

c. 10.67%.

d. 8.85%. Get Accounting help Today

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