Question 1

Short-term financing offers greater flexibility than long-term financing.

Accepted Answer

Short-term financing typically has a shorter repayment period and can be more quickly obtained and adjusted based on changing financial needs, providing greater flexibility compared to long-term financing.

Question 2

Using the conservative approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

Accepted Answer

In the conservative approach, long-term financing is used to finance both fixed assets and permanent current assets, with only temporary or seasonal fluctuations in current assets being financed by short-term financing.

Question 3

Short-term financing sources include bank loans, trade credit, and commercial paper.

Accepted Answer

Short-term financing sources commonly include bank loans, trade credit, and commercial paper.

Question 4

A firm's choice of financing strategy depends on a number of factors including its operating characteristics, cost, flexibility, and the ease of obtaining future financing.

Accepted Answer

The statement is true.

Question 5

The aggressive financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.

Accepted Answer

The aggressive financing approach involves using short-term financing to fund both short-term and long-term needs, rather than matching the maturities of assets and liabilities.

Question 6

The need for current funds increases when there is an upswing in the business cycle or the sales cycle of an industry.

Accepted Answer

During periods of growth in the business cycle or industry sales cycle, companies often need to invest in additional resources such as inventory, equipment, and advertising in order to take advantage of the growing demand. This requires more current funds to be available for these investments.

Question 7

A line of credit costs the firm only the normal interest for the period during which money is actually borrowed.

Accepted Answer

A line of credit allows a firm to borrow money as needed, and they only pay interest on the amount borrowed during the time it is actually borrowed. This can make it a cost-effective financing option compared to other types of loans where the entire amount is borrowed upfront and interest is charged on the full amount from the start.

Question 8

Working capital includes a firm's marketable securities, accounts receivable, inventories, and mortgage debt.

Accepted Answer

Working capital includes a firm's current assets (such as accounts receivable, inventory, and cash) minus its current liabilities (such as accounts payable and short-term debt). Marketable securities and mortgage debt are not considered part of working capital.

Question 9

The choice of financing strategy involves a tradeoff between return and risk.

Accepted Answer

The financing strategy involves a balance between the potential return that can be generated and the associated risk. Companies must consider their risk tolerance and the costs and availability of various financing options when choosing a financing strategy.

Question 10

Using aggressive approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

Accepted Answer

Aggressive financing approach means using more debt financing than equity financing. In this approach, long term financing is used to finance fixed assets, such as property, plant, and equipment, which have a long useful life and generate long term returns. Short term financing, such as lines of credit, is used to finance current assets, such as inventory and accounts receivables, which have a shorter useful life and fluctuate with the business cycle. This approach can increase the return on investment but also increases the risk of insolvency.

Question 11

An aggressive financing plan has a higher financing cost, but with lower risk of not being able to borrow when short-term funds are needed.

Accepted Answer

An aggressive financing plan typically involves a higher proportion of short-term debt, which usually has lower financing costs but comes with a higher risk of not being able to borrow when needed due to its reliance on the short-term credit markets.

Question 12

If net working capital is negative, current assets are partially financed by the firm's long-term debt.

Accepted Answer

The answer of If net working capital is negative, current...

Question 13

The prime rate is the interest rate the bank charges its most creditworthy customers.

Accepted Answer

This is correct. The prime rate is typically lower than other interest rates offered by the bank, and is reserved for customers with excellent credit histories and financial standing.

Question 14

Firms using maturity matching will have current ratios equal to 1.0.

Accepted Answer

Maturity matching is a strategy of matching the maturity of assets and liabilities. This means that long-term assets are financed with long-term liabilities, and short-term assets are financed with short-term liabilities. This strategy does not necessarily result in a current ratio of 1.0, as it depends on the specific assets and liabilities involved.

Question 15

A line of credit is also often referred to as a revolving credit agreement.

Accepted Answer

The answer of A line of credit is also often...

Question 16

The conservative financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.

Accepted Answer

The conservative financing approach involves using long-term financing to fund both long-term and short-term assets, rather than matching maturities.

Question 17

Permanent current assets reflect the minimum investment level in cash, accounts receivable, and inventories needed to support sales.

Accepted Answer

Permanent current assets are the minimum level of current assets required to support the ongoing operations of a business, including cash, accounts receivable, and inventory.

Question 18

An advantage of short-term borrowing is the need for frequent renewals.

Accepted Answer

The statement is incorrect. An advantage of short-term borrowing is that it does not require frequent renewals as the debt can be paid off quickly.

Question 19

The maturity matching approach is a financing strategy that attempts to match the maturities of assets with the maturities of the liabilities which they are financed.

Accepted Answer

The statement accurately describes the maturity matching approach.

Question 20

Service industries tend to have larger proportions of fixed assets to current assets.

Accepted Answer

Service industries typically have lower proportions of fixed assets to current assets because they rely more on human capital and less on physical assets compared to manufacturing or industrial companies.

Quiz 16: Short-Term Business Financing