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Chapter 3: 6DQ (page 182)

By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

Short Answer

Expert verified

Long-term financing is an expensive financing method, whichwill lower the organization’s profits.

Step by step solution

01

Meaning of long-term financing

Long-term financing refers to the financing taken by an organization for more than one year. This financing option is taken to fulfil the long-term financial requirements of the organization.

02

The significance of the given statement

If the company uses long-term financing for its current temporary assets, it will provide the necessary funds in the long term, but the cost of long-term financing is higher than that of short-term financing. So, the profits generated by the organization will be lower when utilizing long-term financing.

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Most popular questions from this chapter

Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is \(150,000. The company can borrow \)150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.

How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 10 percent, three-year loan?

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.

c. What will the average inventory be?

If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

b. How many orders will be placed during the year?

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

a. Fill in column (4) for each month.

Age of receivables April 30 20X1

1

2

3

4

Month of sales

Age of accounts

Amounts

Percent of amount due

April

0-30

\(131,250

____

March

31-60

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February

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\(112,500

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January

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\)37,500

____

Total receivables

$375,000

100%
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