Reading 46: Working Capital Management - LOS g ～ Q1-3 financing, likely, style

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1.A large, creditworthy manufacturing firm would most likely get short-term financing by:

A)   factoring its receivables.

B)   issuing commercial paper.

C)   entering into an agreement for a committed line of credit.

D)   issuing banker’s acceptances.

2.Which of the following sources of credit would an analyst most likely associate with a borrower of the lowest credit quality?

A)   Revolving line of credit.

B)   Regular line of credit.

C)   Committed line of credit.

D)   Uncommitted line of credit.

3.Which of the following sources of short-term liquidity is considered reliable enough that it can be listed in the footnotes to a firm’s financial statements as a source of liquidity?

A)   Factoring agreement.

B)   Blanket lein.

C)   Uncommitted line of credit.

D)   Revolving line of credit.

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答案和详解如下：

1.A large, creditworthy manufacturing firm would most likely get short-term financing by:

A)   factoring its receivables.

B)   issuing commercial paper.

C)   entering into an agreement for a committed line of credit.

D)   issuing banker’s acceptances.

The correct answer was B)

Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper. Selling receivables to a factor is a higher cost source of funds used by firms with poor credit quality. A committed line of credit requires payment of a fee and represents bank borrowing, which would be attractive to a firm that did not have the size or creditworthiness to issue commercial paper. Banker’s acceptances are issued by banks for the benefit of a customer who imports goods.

2.Which of the following sources of credit would an analyst most likely associate with a borrower of the lowest credit quality?

A)   Revolving line of credit.

B)   Regular line of credit.

C)   Committed line of credit.

D)   Uncommitted line of credit.

The correct answer was D)

A regular and committed line of credit refer to the same thing. These types of credit lines and revolving lines of credit all contain a commitment by a lender to lend up to a maximum amount, at the borrower’s option for some period of time. A firm with lower credit quality may have an uncommitted line of credit which offers no guarantee from the lender to provide any specific amount of funds in the future.

3.Which of the following sources of short-term liquidity is considered reliable enough that it can be listed in the footnotes to a firm’s financial statements as a source of liquidity?

A)   Factoring agreement.

B)   Blanket lein.

C)   Uncommitted line of credit.

D)   Revolving line of credit.

The correct answer was D)

With an uncommitted line of credit, the lender is not committed to make loans in any amount. A revolving line of credit is typically for a longer period and involves an agreement to lend funds in the future up to some maximum amount. A blanket lien is a claim against all firm assets. Factoring does not typically involve an agreement for future receivables purchases.

 

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