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-ridingWhat effect does collection policy have on sales, collection time, and bad-debt loss percentage?Which of the following would increase risk? a. Raise the level of working capital b. Increase the amount of equity financing c. Increase the amount of short term borrowing d. Decrease the amount of inventory by formulating an effective inventory policy
- How does collection policy influence sales, the collection period, and the bad debtloss percentage?Tirole’s model of moral hazard associated with external financing (whether debt or equity) has nothing to do with risk-taking. Characterize the basis of moral hazard in his model. Then explain the type of rationing that the model predicts.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 False
- Which 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 instrumentsAgency 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.Which one of the following statements is correct? A. If a firm decreases its inventory period, its accounts receivable period will also decrease. B. The longer the cash cycle, the more cash a firm typically has available to invest. C. A firm would prefer a negative cash cycle over a positive cash cycle. D. Decreasing the inventory period will also decrease the payables period. E. Both the operating cycle and the cash cycle must be positive values.
- Calculating the margin of safety (MOS) measure will help a firm answer which of the following questions? How much will operating profit (πB) change if sales change? Are we using our debt wisely? Will we break even? How much revenue can we lose before we drop below the breakeven point? How much operating profit (πB) will we earn?Suppose a company’s current credit terms are 1/10,net 30, but management is considering changingits terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-payingcustomers. How would you expect these changesto affect (a) sales, (b) the percentage of customerswho take discounts, (c) the percentage of customers who pay late, and (d) the percentage of customers who end up as bad debts?Thinking about the definition of the term "flotation costs," should we expect the flotation costs for debt to be significantly lower than those for equity? Why or why not? how can the answer be supported.