The Chief Financial Officer at HB Electronics Notes That Its

question 103

Essay

The Chief Financial Officer at HB Electronics notes that its cost of debt is below that of equity.He reasons that the firm should ensure that it is able to increase its borrowings,because otherwise the firm will be forced to use more expensive equity to finance its new projects.Then,the firm may have to reject some projects that it would have accepted when evaluated at the lower cost of debt.Comment on this reasoning.

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Definitions:

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over a specified period, indicating the efficiency of inventory management.

Accounts Receivable Turnover

A financial ratio indicating how quickly a company collects on outstanding accounts receivable, calculated by dividing total net sales by the average accounts receivable during a period.

Cash Cycle

The amount of time it takes for a company to convert its investments in inventory back into cash through sales.

Inventory Turnover Rate

A metric that shows how many times a company's inventory is sold and replaced over a certain period of time.