Question 1

Firms generally choose to finance temporary assets with short-term debt because

Accepted Answer

Matching the maturities of assets and liabilities reduces risk because it minimizes the exposure to interest rate fluctuations and reduces the risk of default. Short-term debt is appropriate for financing temporary assets that will be converted to cash within a year, as it allows the firm to adjust its borrowing needs and interest expenses to changes in cash flows.

Question 2

Firms having difficulty borrowing short-term funds from banks can raise short-term funds by issuing commercial paper.

Accepted Answer

The answer of Firms having difficulty borrowing short-term funds from...

Question 3

An arrangement in which a bank agrees to lend up to a specified maximum of funds as needed over a specified time period is a

Accepted Answer

A line of credit is an arrangement in which a bank agrees to lend up to a specified maximum of funds as needed over a specified time period. This provides the borrower with ready access to funds as needed, which can be useful for managing cash flow or financing short-term needs.

Question 4

Seagar Corporation provides monofilament fishing line to its customers.Seagar gives its customers a three percent discount if the invoice payment is paid within 10 days of the billing date.If the discount is not taken then the balance must paid in full within 45 days of the billing date.Any unpaid balances over 45 days beyond the billing date will be assessed a five percent penalty every 30 days, beginning 46 days after the billing date.Seagar is said to sell on credit with terms of what?

Accepted Answer

The terms of "3/10, net 45" mean that customers can get a 3% discount if they pay within 10 days of the billing date, and the full balance is due within 45 days of the billing date. Therefore, Seagar Corporation sells on credit with terms of 3/10, net 45.

Question 5

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

Accepted Answer

Stretching accounts payable means delaying payment to suppliers, which can often result in penalties or a damaged relationship with the supplier. It is considered a real financial cost for the supplier/firm, even if the customer eventually pays off the entire balance.

Question 6

A firm that "stretches" its accounts payable rather than paying on net terms is actually increasing its calculated cost of credit given that it already does not take discounts when offered, other things held constant.

Accepted Answer

The answer of A firm that "stretches" its accounts payable...

Question 7

If a firm is involuntarily "stretching" its accounts payable then this is one sign that it is undercapitalised; that is, that it needs more working capital for operations.

Accepted Answer

When a firm "stretches" its accounts payable, it means that it is delaying payment to its suppliers beyond the normal payment terms. This may be a sign that the firm is having cash flow problems and is undercapitalized. It needs more working capital to finance its operations and pay its bills on time.

Question 8

An important difference between revolving credit and a general line of credit is

Accepted Answer

Unlike a general line of credit, a revolving line of credit does not have a legal obligation for a bank to honor it. Instead, the bank can choose to revoke or reduce the credit limit at any time. As such, revolving credit typically involves higher interest rates and fees to compensate for the additional risk.

Question 9

The prime rate charged by big money center banks can vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles, such as mainly making loans to small firms.

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The answer of The prime rate charged by big money...

Question 10

Under the terms of trade found in most industries, the costly component of trade credit

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The answer of Under the terms of trade found in...

Question 11

When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss.

Accepted Answer

The answer of When a firm pledges its accounts receivable,...

Question 12

A document specifying the terms and conditions of a bank loan, including the amount, interest rate, repayment schedule, and any other terms or conditions of the loan is a

Accepted Answer

A promissory note is a written contract between a borrower and a lender that outlines the terms and conditions of a loan. It includes details such as the loan amount, interest rate, repayment schedule, and any other terms or conditions of the loan.

Question 13

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Accepted Answer

This is a true statement that accurately describes a revolving credit agreement.

Question 14

Which of the following statements concerning commercial paper is false?

Accepted Answer

The answer of Which of the following statements concerning commercial...

Question 15

Financial managers should always use the free component of the trade credit, but they should use the costly component only after analysing this source of financing to make sure

Accepted Answer

Financial managers should only use the costly component of trade credit if it is less than the cost of funds for the firm. This means that the benefits of using trade credit (such as delaying payment and improving cash flow) should outweigh the costs (such as the interest charged on the outstanding amount). Therefore, option C is the best choice.

Question 16

Which of the following aspects is not important to business when choosing a bank?

Accepted Answer

The answer of Which of the following aspects is not...

Question 17

Inventory financing can take the form of a

Accepted Answer

Inventory financing can take any of the forms listed in the answer choices: blanket lien, trust receipt, and warehouse receipt. Therefore, the best choice is D, which includes all of these options.

Question 18

Which of the following is not a common type of short term financing?

Accepted Answer

Corporate bonds are typically long-term financing instruments and are not commonly used as a type of short-term financing. The other options listed, including commercial paper, accruals, trade credit, and bank loans, are all common types of short-term financing.

Question 19

Small, undercapitalised firms

Accepted Answer

The answer of Small, undercapitalised firms
...

Question 20

Accruals are generally considered __________ debt since __________ interest is paid on accruals.

Accepted Answer

The answer of Accruals are generally considered __________ debt since...

Quiz 16: Managing Short-Term Liabilities Financing