Question 1

Trade credit may be considered the least formal of all forms of financing.

Accepted Answer

Trade credit is often extended by suppliers and involves the supplier allowing the buyer to defer payment for a certain period of time after goods or services have been received. This type of financing is often informal and may not involve extensive paperwork or formal agreements.

Question 2

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

Accepted Answer

This is because financing strategies that offer higher returns usually come with higher risks, while strategies with lower risks may offer lower returns. Companies must assess the tradeoff carefully and choose a financing strategy that best fits their needs and goals.

Question 3

Short-term financing may come in the form of trade credit extended between businesses.

Accepted Answer

Trade credit is a common form of short-term financing in which a business receives goods or services from another business and agrees to pay for them at a later date. This arrangement allows the buyer to delay payment and manage cash flow effectively while still obtaining the necessary goods or services.

Question 4

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 answer of The conservative financing approach is a strategy...

Question 5

An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyer's bank.

Accepted Answer

An acceptance is a type of financial instrument that is created when a buyer agrees to pay for goods or services on a specific date in the future. This agreement is typically documented using a draft or bill of exchange, which is a written order from the seller to the buyer to pay a specific amount on a specific date. Once the buyer accepts the terms of the draft, it becomes an acceptance, which represents a receivable for the seller. The acceptance can then be discounted or sold to a third party, providing the seller with immediate cash for the transaction.

Question 6

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 7

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security,it must execute an assignment of these accounts to the bank.

Accepted Answer

When a borrowing firm pledges its accounts receivable as security for a bank loan, it must execute an assignment of these accounts to the bank. This allows the bank to collect the payments from the accounts receivable if the borrower defaults on the loan.

Question 8

To compute the effective cost of a revolving agreement,the joint effect of interest on borrowed funds and commitment fees must be considered.

Accepted Answer

The statement is true. Effective cost includes both interest and commitment fees.

Question 9

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security,it eliminates the need for a credit investigation.

Accepted Answer

Pledging accounts receivable as security does not eliminate the need for a credit investigation. While the accounts receivable serve as collateral for the loan, the lending institution still needs to assess the borrower's creditworthiness and ability to repay the loan.

Question 10

Stocks and bonds are rarely used as collateral for short-term loans.

Accepted Answer

Stocks and bonds can be used as collateral for short-term loans, especially in the case of margin loans where investors borrow money to invest in the stock market. However, other types of collateral such as real estate or business assets may be preferred due to their higher stability and tangible value.

Question 11

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

Accepted Answer

Short-term financing allows for quicker access to funds and greater flexibility in terms of adjusting the amount borrowed and repayment terms. Long-term financing often requires more stringent criteria and can have higher interest rates, which can limit flexibility.

Question 12

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

This statement is true. A firm's financing strategy is influenced by various factors such as its business model, cost of capital, debt-to-equity ratio, financial flexibility, and the ease of obtaining future funding. These factors can vary from one firm to another, and therefore, the financing mix pursued by each company may also differ.

Question 13

A discounted loan is one in which the borrower receives a discount on the interest rate.

Accepted Answer

A discounted loan is one where the lender deducts the interest and fees upfront before giving the borrower the net loan amount, rather than offering a discount on the interest rate.

Question 14

Industry characteristics can affect whether the firm chooses an aggressive,conservative,or maturity matching strategy for financing its assets.

Accepted Answer

Industry characteristics such as cyclicality, growth potential, and availability of financing options can significantly impact the firm's financing decisions. For instance, a firm operating in a cyclical industry might adopt a conservative approach to financing to weather economic downturns, while a high-growth firm may be more willing to use aggressive financing strategies. Similarly, a mature firm may prefer to match its assets' maturities with its liabilities to reduce refinancing risk, while a young firm may opt for a more flexible financing structure to support growth opportunities.

Question 15

An owner of a business may not assign life insurance as collateral for a short-term loan.

Accepted Answer

An owner of a business may assign life insurance as collateral for a short-term loan.

Question 16

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 17

A discounted loan is one in which the borrower receives the principal plus the interest at the time the loan is made.

Accepted Answer

A discounted loan is one in which the interest is deducted from the principal when the loan is made, and the borrower receives the net proceeds. The borrower is still responsible for paying back the full principal amount.

Question 18

A commercial finance company typically purchases the accounts receivable outright and assumes all credit risks.

Accepted Answer

A commercial finance company may provide financing by advancing funds based on accounts receivable, but it usually does not purchase them outright. Instead, it uses them as collateral, and the original company often remains responsible for the credit risk unless factoring is specifically involved.

Question 19

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

This statement is true. The aggressive approach to financing involves using long-term financing to finance fixed assets, which have a longer lifespan and can generate revenue over time. Short-term financing is used to finance current assets, such as inventory and accounts receivable, which may fluctuate seasonally and require more frequent financing.

Question 20

A revolving credit agreement is a commitment in the form of a standby agreement for a guaranteed line of credit.

Accepted Answer

A revolving credit agreement provides a guaranteed line of credit that can be drawn upon as needed. It is often used for businesses to ensure they always have access to funding without having to reapply for a loan each time they need it.

Quiz 16: Short-Term Business Financing