Question 1

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Accepted Answer

True

Question 2

"Stretching" accounts payable is a widely accepted and costless financing technique.

Accepted Answer

False

Question 3

Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.

Accepted Answer

Short-term financing typically involves borrowing money that must be repaid within a year or less. If credit markets tighten up or interest rates rise, it may be difficult or impossible for the firm to refinance or renew its short-term debt, which could lead to a liquidity crisis or default. Long-term financing, by contrast, typically involves borrowing money for periods of 5-20 years or more, which gives the firm more predictability and stability in its funding sources.

Question 4

A firm is said to be extending net trade credit when its accounts receivable are less than its accounts payable.

Accepted Answer

Net trade credit refers to the difference between a company's accounts receivable and accounts payable. If a firm's accounts receivable are less than its accounts payable, it means it has received more trade credit from suppliers than it is offering to its customers, which indicates it is extending net trade credit.

Question 5

One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit.

Accepted Answer

Short-term debt can be quickly and easily adjusted to match a company's needs, whereas long-term debt is more rigid and difficult to modify. As a result, short-term debt gives businesses greater flexibility to react to changing market conditions.

Question 6

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan.The separate indenture note will specify items such as collateral and other terms and conditions.

Accepted Answer

A promissory note is a legal document that includes the borrower's promise to repay the loan, the amount of the loan, the interest rate, and the repayment terms. An indenture note, on the other hand, is a separate document that outlines the terms and conditions of the loan, including any collateral that is pledged as security for the loan.

Question 7

When deciding whether or not to take a trade discount, the cost of borrowing funds should be compared to the cost of trade credit to determine if the cash discount should be taken.

Accepted Answer

When deciding whether or not to take a trade discount, it is important to compare the cost of borrowing funds (such as interest rates on loans) to the cost of trade credit (the cost of using the supplier's financing terms). Only then can a decision be made about whether or not to take the cash discount offered for early payment.

Question 8

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Accepted Answer

Trade credit is an agreement between businesses in which one business agrees to pay for goods or services at a later date, typically 30 to 60 days. If the supplier does not offer discounts for early payment, trade credit can be a relatively low-cost source of short-term financing.

Question 9

The maturity of most bank loans is short-term.Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

Accepted Answer

Most bank loans are short-term and business loans are often 90-day notes that can be rolled over or renewed at the end of their maturity.

Question 10

The calculated cost of trade credit is reduced by paying late.

Accepted Answer

The answer of The calculated cost of trade credit is...

Question 11

A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Accepted Answer

The answer of A line of credit and a revolving...

Question 12

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Accepted Answer

This statement accurately describes a line of credit.

Question 13

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Accepted Answer

The answer of Trade credit can be separated into two...

Question 14

When a firm has accounts payable that are greater than the level of its receivables, the firm is actually receiving net trade credit.

Accepted Answer

The answer of When a firm has accounts payable that...

Question 15

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

Accepted Answer

Not taking trade credit discounts means paying the full amount of the invoice later, and therefore, the firm's investment in accounts payable increases.

Question 16

Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.

Accepted Answer

While trade credit and accrual accounts do not involve explicit interest or financing charges, there are still implicit costs involved, such as potential strain on supplier relationships and loss of discounts for early payment.

Question 17

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant)
if the firm pays in 40 days than if it pays in 30 days.

Accepted Answer

The answer of The calculated cost of trade credit for...

Question 18

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Accepted Answer

Short-term loans are typically less complex and require less evaluation of the borrower's financial health than long-term loans, which is why they can be obtained faster.

Question 19

As a rule, managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

Accepted Answer

This statement is true. Managers should always try to utilize the free component of trade credit (i.e. taking advantage of early payment discounts) but should carefully evaluate the costs of the costly component (i.e. delaying payments past the due date) before using it, and compare it to the costs of obtaining credit from other sources.

Question 20

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

Accepted Answer

The answer of If a firm is offered credit terms...

Quiz 17: Financial Planning and Control