Kingpin804

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

A) factoring its receivables.

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

C) issuing commercial paper.

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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.

Kingpin804

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

A) Uncommitted line of credit.

B) Committed line of credit.

C) Revolving line of credit.

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Committed 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.

Kingpin804

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) Uncommitted line of credit.

C) Revolving line of credit.

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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. Factoring does not typically involve an agreement for future receivables purchases.

Kingpin804

Which of the following sources of liquidity is the most reliable?

A) Committed line of credit.

B) Uncommitted line of credit.

C) Revolving line of credit.

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A revolving line of credit is typically for a longer term than an uncommitted or committed line of credit and thus is considered a more reliable source of liquidity. With an uncommitted line of credit, the issuing bank may refuse to lend if conditions of the firm change. An overdraft line of credit is similar to a committed line of credit agreement between banks and firms outside of the U.S. Both committed and revolving lines of credit can be verified and can be listed in the footnotes to a firm’s financial statements as sources of liquidity.