A Firm Faces a Liquidity Crunch and Must Decide Between

question 49

Multiple Choice

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest or stretching its payables for one quarter. If it stretches the payables it will forgo a 2% discount for timely payment. Based solely on cash flows, which would you suggest?

• A) Stretching saves the firm approximately 8% per year.
• B) Use the bank loan; forgoing a cash discount is costly.
• C) Stretch the payables and finance at a savings of approximately 3.75% annually.
• D)Use the bank loan because it represents simple interest.

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Definitions:

Courage to Take Risks

The bravery to engage in actions or decisions that involve uncertainty or potential for failure.

Entrepreneurship

The act of creating, designing, and running a new business, often characterized by innovation and risk-taking.

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A technique used to encourage desired behaviors by offering rewards or positive outcomes when those behaviors are exhibited.

Desired Behavior

The specific actions or conduct that an entity, such as an organization, seeks to encourage or reinforce among its members.