Financial Managers Should Always Use the Free Component of the Trade

question 77

Multiple Choice

Financial managers should always use the free component of the trade credit, but they should use the costly component only after analysing this source of financing to make sure

• A) that it is greater than the cost of funds for the firm.
• B) that it has a maturity less than the average collection period.
• C) that it is less than the cost of funds for the firm.
• D) that the default risk inherent in accepting this trade credit is low.
• E) that firms offering the trade credit does not issue commercial paper.

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Definitions:

Compromise Policy

A strategy or approach that involves making concessions or finding a middle ground between different opinions or objectives in decision-making processes.

Cash Dividend

A distribution of a company's earnings to shareholders in the form of cash, indicating the company's underlying profitability and cash flow health.

Flotation Costs

Costs that a company faces when it issues new securities, consisting of fees for underwriting, legal services, and registration.

Dividend Increases

The action of a company raising the amount of dividend payments to its shareholders.