Which of the Following Is True of Changes in Cash

question 207

Multiple Choice

Which of the following is true of changes in cash discount period?

• A) If a firm decreases its cash discount period, the sales are expected to decrease, the bad debts are expected to increase, and the profit per unit is expected to increase.
• B) If a firm decreases its cash discount period, the sales are expected to increase, the bad debts are expected to increase, and the profit per unit is expected to decrease.
• C) If a firm increases its cash discount period, the sales are expected to decrease, the bad debts are expected to decrease, and the profit per unit is expected to increase.
• D) If a firm increases its cash discount period, the sales are expected to increase, the bad debts are expected to decrease, and the profit per unit is expected to increase.

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Definitions:

Degree Of Total Leverage

A measure that quantifies the sensitivity of a company's earnings before interest and taxes to a change in its sales.

Financial Leverage

The use of borrowed capital or debt to increase the potential return of an investment.

Operating Leverage

Operating leverage is a measure of how revenue growth translates into growth in operating income, indicating the extent to which a company can increase its profits by increasing sales.

Modigliani-Miller Model

A foundational financial theory proposing that the market value of a company is determined by its earning power and risk of its underlying assets, and is independent of the way it chooses to finance its investments or distribute dividends.