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
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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.
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- Long-term debt financing can have a possibility of more funding but is more risky in terms of long-term payment of loans. Group of answer choices 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.Which 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.
- What is a limitation common to both the current and quick ratio? * Debtors may not pay on time. Inventories may not be truly liquid. Accounts receivable may not be truly liquid. Prepaid expenses are potential sources of cash. Marketable securities are not liquid.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.Critique this statement: “The use of debt financing lowers the net income of the firm, and hence debt financing should be used only as a last resort.”
- There 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 companyMinimizing liquidity is an excellent way to meet a company's short-term financial obligations. 1) False 2) TrueWhy is it that oftentimes banks refuse to lend to many borrowers even though they offer high interest rates? To reduce the exposure to diversification risk. To reduce the exposure to interest rate risk. To reduce the exposure to credit risk. To reduce transactions costs To reduce the free-rider problem.
- How does a firm's use of short-term debt as opposed to long-term debt subject the firm to a greater risk of illiquidity? Give tangible examplesTrue/False and Explain: Josephine says that firms which obtain debt financing by posting collateral, face a lower cost of debt than firms that try to obtain debt without posting collateral.Balance Sheet Insolvency occurs when Liabilities are greater than the Assets resulting in negative capital equity. For a Financial Institution, Insolvency Risk can be defined as the risk that there is insufficient capital to offset either a decrease in the market value of assets relative to liabilities or an increase in liabilities relative to the market value of assets. A. Describe a situation where Insolvency Risk could be caused one of the many risks that a Financial Institution may face. B. Describe the best protection against insolvency risk at a Financial Institution.