Financial Decisions

Question 1

Short-Term borrowing
what are advantages and disadvantages?

B6-56

Answer 1

Lower rates
A: inc liquidity and probability
D: inc IR risk, dec capital availability
strategy: use w/ higher lvls of temp working capital

Question 2

Long-term borrowing
what are advantages and disadvantages?

B6-57

Answer 2

higher rates
A: dec IR risk, inc capital availability
D: dec liquidity and probability
strategy: use w/ higher lvls of permanent working capital

Question 3

working capital financing
definition

B6-58

Answer 3

spontaneous financing of CA w/ trade AP and accrued liabilities

Question 4

Letter of Credit
definition

B6-58

Answer 4

3rd party guarantee of financing obligations incurred by the Co.

Question 5

Line of Credit
definition

B6-58

Answer 5

revolving loan w/ bank that is up to a specific dollar max amount, for a defined term, and is renewable upon maturity date

Question 6

Leasing Options
the two types are:

B6-59

Answer 6

1. operating leases

2. capital (financing) lease

Question 7

Leasing Options
define Operating Leases

B6-59

Answer 7

off-BS financing for the lessee

-there are no BS effect w/ the periodic rent payments reflected as rent exp on IS

Question 8

Leasing Options
define Capital (financing) lease

B6-59

Answer 8

analogous to lessee buying asset and financing w/ debt
-lessee records PV of min lease payments as an asset of BS as well as the corresponding current and L-T lease obligations.

Question 9

Capital (financing) lease
1 of 4 criteria are:

B6-59

Answer 9

O– Ownership transfer at end of lease
W– Written option for bargain purchase
N– Ninety 90% of lease property FV