Chapter 10: Short Term Finance: Working Capital

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| By S11159115

S11159115

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Quizzes Created: 3 | Total Attempts: 242

Questions: 7 | Attempts: 58 | Updated: Jan 27, 2023

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Questions and Answers

1.

Working capital is defined as the funds invested in:
- A.
  
  Non-current assets
- B.
  
  inventory
- C.
  
  Receivables
- D.
  
  Current assets
Correct Answer
D. Current assets

Explanation
Working capital is defined as the funds invested in current assets.

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2.

Which of the following is not classified as permanent funding?
- A.
  
  Commercial bills
- B.
  
  Long-term debt
- C.
  
  Leases
- D.
  
  Ordinary shares.
Correct Answer
A. Commercial bills

Explanation
Commercial bills provide short-term funding. The other items raise funds with maturities greater than one year and are therefore classified as permanent funding.

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3.

Floor-plan finance is most likely to be used by:
- A.
  
  A supermarket
- B.
  
  A real estate agent
- C.
  
  A retailer of motor vehicles
- D.
  
  A firm of public accountants
Correct Answer
C. A retailer of motor vehicles

Explanation
Note that floor-plan finance can only be used when the business has readily-identifiable, high-value items for sale. Service providers such as real estate agents and firms of public accountants carry no inventory to support floor-plan finance.

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4.

Which of the following is not a source of informal short-term finance?
- A.
  
  Accrued wages
- B.
  
  Superannuation and taxes
- C.
  
  Factoring
- D.
  
  Trade credit
Correct Answer
C. Factoring

Explanation
Factoring is a formal source of short-term finance

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5.

A commercial bill with a face value of $50 000 has a current price of $49291. This bill is trading at a yield of 7.5% which necessarily implies a time to maturity of:
- A.
  
  70 days
- B.
  
  80 days
- C.
  
  90 days
- D.
  
  100 days.
Correct Answer
A. 70 days

Explanation
The yield of a commercial bill is the return an investor can expect to receive based on its current price. In this case, the bill is trading at a yield of 7.5%. The formula to calculate yield is yield = (face value - current price) / current price * (365 / time to maturity). Rearranging the formula, we can solve for time to maturity: time to maturity = (face value - current price) / (current price * yield) * 365. Plugging in the values given, we get time to maturity = (50000 - 49291) / (49291 * 0.075) * 365 = 70 days. Therefore, the correct answer is 70 days.

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6.

A promissory note with a face value of $500 000 has 45 days until maturity. If the relevant yield is 7% then the current price of this promissory note is:
- A.
  
  $495 722
- B.
  
  $498 722
- C.
  
  $495 120
- D.
  
  $495 788.
Correct Answer
A. $495 722

Explanation
The current price of the promissory note can be calculated using the formula for present value of a bond. The formula is: PV = FV / (1 + r)^n, where PV is the present value, FV is the face value, r is the yield, and n is the time until maturity in years. In this case, the face value is $500,000, the yield is 7% (or 0.07 as a decimal), and the time until maturity is 45/365 years. Plugging in these values, the calculation gives a present value of approximately $495,722.

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7.

A commercial bill with a face value of $100 000 has a current price of $97 711. This bill has 95 days to maturity which necessarily implies that its yield is:
- A.
  
  8%
- B.
  
  9%
- C.
  
  10%
- D.
  
  11%.
Correct Answer
B. 9%

Explanation
The yield of a bill is the rate of return it offers to investors. In this case, the bill has a face value of $100,000 and a current price of $97,711. The yield can be calculated by taking the difference between the face value and the price, dividing it by the face value, and then multiplying by 100 to get a percentage. In this case, the difference is $2,289 ($100,000 - $97,711), and dividing by the face value gives 0.02289. Multiplying by 100 gives a yield of 2.289%. However, since the bill has a 95-day maturity, we need to annualize the yield. By using a formula to annualize the yield, we find that it is approximately 9%.

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Current Version
Jan 27, 2023

Quiz Edited by
ProProfs Editorial Team
Apr 30, 2020

Quiz Created by
S11159115

Chapter 10: Short Term Finance: Working Capital

Working capital is defined as the funds invested in:

Which of the following is not classified as permanent funding?

Floor-plan finance is most likely to be used by:

Which of the following is not a source of informal short-term finance?

A commercial bill with a face value of $50 000 has a current price of $49291. This bill is trading at a yield of 7.5% which necessarily implies a time to maturity of:

A promissory note with a face value of $500 000 has 45 days until maturity. If the relevant yield is 7% then the current price of this promissory note is:

A commercial bill with a face value of $100 000 has a current price of $97 711. This bill has 95 days to maturity which necessarily implies that its yield is: