Firm a Is Based and Operates in a Country Where

question 7

Multiple Choice

Firm A is based and operates in a country where financial markets are well developed.In this market long terms loans (from banks or through the issuance of bonds) are available and normally used by business entities as their source of external long-term funds.Firm B is based and operates in a country where the financial markets are not well developed.In this market is it commonplace for banks to offer,year after year,revolving short-term loans to their trusted customers.Assuming that both firms are identical in all aspects save for their external financing (Both firms' shareholders' equity equals a third of their total assets) ,how do their working capital need (WCN) compare? Which of the combinations shown below is highly improbable?

• A) If A has a positive WCN,B is likely to have a positive WCN
• B) If A has a positive WCN,B is likely to have a negative WCN
• C) If A has a negative WCN,B is likely to have a positive WCN
• D) If A has a negative WCN,B is likely to have a negative WCN

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