Assuming That We Can Earn a 13

question 26

Multiple Choice

Assuming that we can earn a 13.5% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal?

• A) a reduction in marketable securities which are earning a return of 14.2%
• B) a decrease in inventories which are earning a 17.6% return
• C) an increase in bank loans that would cost us 11.5%
• D) an increase in accounts payable that would cost our firm 15%

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Definitions:

Equivalent Amount

An equivalent amount refers to a value that has the same worth or value as another in a different form or denomination.

Money

A medium of exchange that is widely accepted in payment for goods and services and in settlement of debts.

Annually Compounded

Refers to the process of calculating and adding interest to a principal sum once per year.

Maturity Values

The amount payable to the holder of a financial instrument at its maturity date, often the principal plus interest.