AFB,IncPurchases a New Delivery Van Which Is Expected to Increase

question 122

Multiple Choice

AFB,Inc.purchases a new delivery van which is expected to increase cash flows for the next 10 years.AFB can finance the purchase with a standard 48-month vehicle loan,or by getting a 10-year loan from the bank.According to the hedging principle,AFB should

• A) use the 10-year financing in order to match the cash flow stream from the asset with the financing repayments.
• B) use the 48-month loan since it matches the type of asset with the type of loan.
• C) use either type of financing, but hedge the risk in the options market.
• D) avoid using either loan and finance the truck with current cash reserves to avoid interest expense.

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Definitions:

Comparative Balance Sheet

A financial statement that presents the assets, liabilities, and equity of a company at two or more different dates for the purpose of comparison.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since it was placed in service, reducing its book value.

Cash Dividends

are profit distributions made by a corporation to its stockholders in the form of cash.

Accounts Receivable

Money owed to a business by its clients or customers for goods or services delivered but not yet paid for.