Financial managers should always use the free component of the trade credit, but they should use the costly component only after analyzing this source of financing to make sure
A)that it is greater than the cost of funds for the firm.
B)that it has a maturity less than the average collection period.
C)that it is less than the cost of funds for the firm.
D)that the default risk inherent in accepting this trade credit is low.
E)that firms offering the trade credit does not issue commercial paper.

Question

Quizplus · Accepted Answer

Financial managers should only use the costly component of trade credit if it has a cost lower than the cost of funds for the firm. This will ensure that the use of trade credit as a financing source is financially beneficial for the company. Options (A) and (D) are not directly related to the cost of funds for the firm, and option (B) refers to the maturity of trade credit, not its cost. Option (E) is not a relevant consideration when analyzing the cost and benefits of using trade credit.

Financial Managers Should Always Use the Free Component of the Trade