Mock Exam #1

Question 1

What is the difference between futures and forward contracts?

Answer 1

Forward contracts tend to be used for larger groups of transactions (such as a large volume of accounts receivable), while futures contracts hedge a specific transaction.

Question 2

What is a letter of credit?

Answer 2

Letters of credit represent a third party guarantee of obligations incurred by a company. Letters of credit may be used by the company issuing debt (debt that would otherwise be unsecured) to ensure payment to creditors.

Question 3

What is a debenture?

Answer 3

Debentures are unsecured debts and do not enhance trade credit capabilities.

Question 4

What is a line of credit?

Answer 4

A line of credit is short-term borrowing from a financial institution to ensure that an entity meets cash flow requirements. The line of credit, however, does not specifically guarantee payments on trade credit.

Question 5

What is a subordinated debenture?

Answer 5

Subordinated debentures are unsecured debts whose status is below other debts and do not enhance trade credit capabilities.

Question 6

How is after-tax cash flows calculated?

Answer 6

The after-tax cash flows are equal to the pre-tax cash flows net of the tax obligations of the earnings and the tax protection afforded through depreciation. Do not include installation charges in the price of the equipment.