Chapter 10: Short Term Finance: Working Capital
Explore key aspects of short-term finance and working capital through this quiz. Topics include definitions, applications, and calculations relevant to current assets, commercial bills, and promissory notes. Essential for learners in finance aiming to enhance operational funding knowledge.
- 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 assetsExplanation
Working capital is defined as the funds invested in current assets.Rate this question:
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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 billsExplanation
Commercial bills provide short-term funding. The other items raise funds with maturities greater than one year and are therefore classified as permanent funding.Rate this question:
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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 vehiclesExplanation
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.Rate this question:
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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. FactoringExplanation
Factoring is a formal source of short-term financeRate this question:
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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 daysExplanation
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.Rate this question:
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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 722Explanation
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.Rate this question:
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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%.Rate this question:
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Jan 27, 2023Quiz Edited by
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Apr 30, 2020Quiz Created by
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