ECON 102 QUIZ 2 QUESTIONS AND ANSWERS

ECON 102 QUIZ 2 QUESTIONS AND ANSWERS 25. When using the economic order quantity model A) ordering costs increase as the level of inventory increases. B) carrying costs decrease as the level of inventory increases. C) costs are minimized when total carrying costs and total ordering costs are equal. D) none of the above Difficulty: Medium Type: Conceptual 26. Hedging A) is a way to protect your accounts receivable position. B) increases risk. C) is a legal agreement to buy or sell a financial futures contract. D) can be carried out with a futures contract. Difficulty: Medium Type: Conceptual 27. Which of the following is not a true statement about commercial paper? A) Finance paper is sold directly to the lender by the finance company. B) Finance paper is also referred to as direct paper. C) Dealer paper is sold directly to the lender by a finance company. D) Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper. Difficulty: Medium Type: Memorization 28. Which of the following best describes the benefits to the borrower of selling asset backed securities? A) Due to the portfolio effect, the borrower can package up low quality accounts receivable and sell them for a premium price. B) The borrower trades future cash flows for current cash flows. C) The asset-backed security is likely to carry a high credit rating of AA or better. D) b and c are correct. Difficulty: Easy Type: Conceptual 29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A) $5,554.50 B) $9,660.00 C) $7,245.00 D) none of the above. Difficulty: Hard Type: Application Chapter 8 Sources of Short-Term Financing 30. Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest? A) 9.3% B) 7.0% C) 11.7% D) None of the above Difficulty: Medium Type: Application 31. The prime rate A) is the effective rate of interest for banks' best customers. B) has been quite volatile during the past two decades, moving as much as 8 percentage points in a 12-month period. C) is usually lower than treasury bill rates. D) none of the above Difficulty: Medium Type: Memorization 32. Accounts receivable may be used as a source of financing by A) pledging the receivables as loan collateral. B) factoring the receivables to a finance company. C) selling securities backed by the receivables. D) all of the above Difficulty: Medium Type: Conceptual 33. The required compensating balance is usually computed as a A) percentage of customer loans outstanding. B) factor of accounts receivable. C) percentage of the bank's commitments toward future loans. D) a and c are correct Difficulty: Medium Type: Conceptual Chapter 9 The Time Value of Money 34. The concept of time value of money is important to financial decision making because A) it emphasizes earning a return on invested capital.