Why Does a Business Firm Require Long-Term Sources of Funds

question 22

Multiple Choice

Why does a business firm require long-term sources of funds?

• A) To finance long-term expenditures for fixed assets
• B) A long-term source of funds replaces the need for insurance
• C) To obtain funds for purchasing inventories
• D) To eliminate the need for frequently seeking short-term financing
• E) To finance annual bonus payments for employees

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Definitions:

EAR

The Effective Annual Rate, a measurement of interest that takes into account the effect of compounding over the period of time it is applied.

Compounded Monthly

The process of calculating interest on an initial principal, which also includes all of the accumulated interest from previous periods on a loan or investment, with the compounding occurring on a monthly basis.

Effective Annual Rate

The interest rate on an investment or loan that considers the effects of compounding over a given time period.

Compounded Quarterly

An investment or loan interest calculation method where interest is added to the principal four times a year.