Chapter 10: Short Term Finance: Working Capital

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Chapter 10: Short Term Finance: Working Capital - Quiz

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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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