Your company has a policy to use long-term debt to finance inventory and receivables. This is a restrictive short-term financing policy? O This policy has higher carrying cost O This policy has higher shortage cost O This policy leads to higher default risk
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- The purpose of the inflation premium is to maintain the purchasing power of money while it is loaned to someone else. TTrueFFalse What kind of problem bad credit risks people pose to financial intermediaries ? AMoral hazard BNone of the above CAdverse Selection DFree-ridingWhen estimating cost of debt, the firm should not simply use current short-term rates because these rates do not reflect expectations regarding Group of answer choices long-term inflation expansionary monetary policy contractionary monetary policy short-term inflationAgency costs of debt arise any time there is a conflict between lender interests and borrower interests. Assuming that agency costs of debt are high at a company relative to the rest of the market, other things being equal, which of the following would you expect to observe with the company's borrowing? It will be able to borrow less than other companies. AND It will have to pay lower interest rates on its loans than otherwise companies. It will have to pay lower interest rates on its loans than otherwise similar companies. It will have to pay lower interest rates on its loans than otherwise similar companies. AND It will face more "covenants" than otherwise similar companies. NONE. it will face more "covenants" than otherwise similar companies. It will be able to borrow less than other companies. It will be able to borrow less than other companies. It will face more "covenants" than otherwise similar companies.
- Long-term financing may be riskier than short-term financing during periods of tight credit because the firm may not be able to rollover (renew) its debt. True FalseTrue or false?:1. From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.Interest costs for short-term debt are generally lower than interest costs for long-term debt because A. short-term debt is more flexible, allowing a match of short-term needs with short-term financing. B. the term structure of interest rates generally reflects an upward sloping yield curve. C. investors demand higher returns on short-term debt due to liquidity concerns. D. both A and B.
- Which of the following is true regarding a company assuming more debt? Select one: a. Assuming more debt is always bad for the company b. Assuming more debt reduces leverage c. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds d. Assuming more debt is always good for the companyThere are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the companyWhich of the following statements best describes financial markets? Answer a. Financial markets are a good example of unregulated markets b. Financial markets increase the speed of buying and selling, but they also increase the cost since people are earning fees for these transactions c. Financial markets today offer fewer instruments than they did in the past d. Financial markets lower the cost and increase the speed of buying and selling financial instruments
- TRUE OR FALSE 1. Short-term financial policies that are flexible with regard to current assets includes keeping large balance of short-term debt. 2. Costs that fall with increases in the level of investment in current assets are called shortage costs. 3. The firm further increases the effective interest rate earned by the bank on the committed line of credit.The goal of credit policy is to Maximise sales Minimise bad debt losses Minimise collection expenses Extend credit to the point where marginal profits equal marginal costsWhich of the following statements is false? A. Credit spreads narrow during an economic recession. B. Credit spreads tend to narrow as broker-dealers become more willing to provide capital. C. Less creditworthy issuers are subject to high market liquidity risk. D. None of the above.