Answer = c: Failure to pay vendors on time might be an early sign of distress with cash flows within the business.
Course 6 - The Management of Capital
Answer = c: Failure to pay vendors on time might be an early sign of distress with cash flows within the business.
Course 6 - The Management of Capital
The cost a business must pay for the use of long-term funds is called the:
a. Indifference Point
b. Cost of Capital
c. Prime Lending Rate
d. Risk Free Rate of Return
Answer = b. The Cost of Capital is the implied cost you must pay for the use of funds. The use of funds on a short-term basis usually takes the form of liquid assets and there may not be implied costs associated with these sources. However, there are real costs for obtaining funds from shareholders (who require a rate of return on their investments) and long-term debt (interest payments for loans).
One of the advantages of issuing debt over equity is that debt:
a. Has no maturity date.
Reduces risk.
Requires no fixed payments.
Has a tax deduction for interest payments.
Answer = d: Interest is a tax deduction and thus the effective rate you pay on debt is lower than the face value paid. There is no deduction for payments made to shareholders, such as dividends or distributions to owners.
When a company uses increased fixed costs for production, this is an example of what type of leverage?
Answer = a: Operating leverage is the use of more fixed costs associated with the operations of the business, such as the manufacturing of products.
According to the pecking order, which of the following sources of capital would managers use first?
a. Bonds (Debt)
b. Common Stock
c. Preferred Stock
d. Retained Earnings
