SOLVED

21) A piece of capital equipment which a company needs for the next three years will cost $150,000 to purchase, with residual value of $50,000. The company can finance the purchase with a loan at 8% requiring quarterly payments. Alternately, the company can undertake a capital lease for the same machinery at $11,494 a quarter and a promise to return the machine at a value of $50,000. Why might the company choose the leasing alternative over the purchase alternative? A) The NPV of the leasing option is higher than the purchase option. B) The lease is capitalized, presenting a greater tax write-off than the loan and, therefore, a lower overall cost. C) The company would have legal control of the asset, how it is used and maintained and its disposal. D) Lease payments present a lower cash outflow per month than the purchase. E) The interest being charged on the lease is lower than on the loan. 22) Henning Fulfillment Ltd. is an outsourcing company that packages and delivers the prizes and premiums awarded from company contests, charitable lotteries and mail-in sweepstakes. As a solution to its temporary liquidity problem it undertook a sale-and-leaseback arrangement with a financial institution with respect to its main warehouse. What may Henning? A) The cost of the lease is higher than if the assets were leased in the usual way. B) The leasing costs cannot be written off as an expense. C) If the warehouse is sold, Henning may not benefit from any capital appreciation of the asset but may be subject to a tax liability for capital gain. D) Henning will not be allowed to vacate the premises after a specified term as the lease arrangement is subject to being continuously rolled forward by the lessor. E) Once the lease cost is established Henning will have no opportunity for rent review if property values, property tax or interest rates drop significantly. 23) Cameron Financial Corporation provides auto dealerships in its region with a direct loan program to be made available to the purchasers of cars and trucks. In addition to normal consumer loan obligations, each loan also has a lien against the purchased vehicle which serves as collateral for the loan. The loans which Cameron provides are then packaged together and are sold to investors. What is the name for the sale of this type of investment package? A) Asset-backed bond issue. B) Loan leveraging. C) Subordinate financing. D) Meta-financing. E) Securitization. 24) What provides the borrower the most flexibility in terms of paying for its financing? A) Factoring, as the full amount of the investment will change depending on the amount of accounts receivable being sold B) Common share equity financing, as the payment of dividends is at the discretion of the board of directors C) Debenture financing as the repayment can be suspended for up to five years D) Bond financing due to the extendable feature allowing the term to be increased by up to 25% of the original length E) Bank borrowings, as the terms of any loan can be renegotiated depending on the performance of the company 25) Which of the following can a business use a credit note to advantage rather than increasing accounts receivable? A) As security to take out a loan but cannot use accounts receivable in this way. B) Against the company’s own accounts payable as most suppliers will accept a third party note in lieu of cash but not accounts receivable. C) To deposit the payment in a savings account at par but receive no interest on the amount until the note is collected. D) To receive cash at the bank at a discount from its face value. E) To avoid collections as, on the date the note is due, the bank will automatically transfer funds from the account of the borrower into the note holder’s account. 26) Which of the following best describes recourse factoring? A) The company, not the factor, assumes the financial loss for bad debts arising from credit sales. B) Uncollectible accounts are covered by insurance. The insurance company keeps any amounts that it may recover from its own collection efforts. C) For an additional fee, the factor assumes responsibility for collecting an agreed upon amount of bad debts but has no legal rights to act against the debtor. D) The factor takes responsibility for bad debts and is legally entitled to pursue the debtor through the courts. E) The initial factor bundles the bad debt contracts and sells them for a deep discount to a subcontractor. 27) Greenland Dairy has annual credit sales of $29.2 million. The company’s collection period is 45 days. The company has been financing its receivables with a bank overdraft at 17%. A proposal from a factoring business offers a cash advance of 80% of receivables at an interest rate of 14%. Further, the factor expects to collect all receivables within 40 days and charge 2% of collections. Greenland will save $50,000 in collections administration. Which of the following will the factoring arrangement do? A) Save the company $14,000 B) Cost the company $14,000 C) Cost the company $389,200 D) Save the company $130,800 E) Save the company $239,000 28) A company seeks a one-time loan on 75% of the face value of its accounts receivable outstanding and must pay within 60 or 90 days regardless of whether it has collected its receivables. What type of financing is the company seeking? A) Accounts receivable factoring. B) Receivables discounting. C) A credit note. D) Working capital monetization. E) Monetizing receivables. 29) Which of the following is an example of an appropriate matching of sources of funds with uses of funds? A) Financing an expansion of accounts receivable with bonds B) Purchasing a truck fleet using accounts receivable discounting C) Financing a decrease in accounts payable with debentures D) Financing an operational plant expansion using factoring E) Purchasing new equipment with a term loan 30) Which form of long-term financing, if available, is usually used before any other? A) Debt B) Common shares C) Preferred shares D) Retained Earnings E) Leases