Finance and Securities: Liquidity and Asset Management
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Questions and Answers

What is the primary purpose of setting credit terms in account receivable?

  • To decide on the short term financing options
  • To determine the creditworthiness of customers (correct)
  • To establish a line of credit with the bank
  • To allocate the requirement for collections

What is the main advantage of debt financing over equity financing?

  • It does not require additional shareholder investment (correct)
  • It allows for greater control over the business
  • It provides tax benefits through interest deductions
  • It provides a higher return on investment

What is the formula to calculate the Net Present Value (NPV) of an investment?

  • NPV = Cash Flow * (1 + i)^t
  • NPV = Cash Flow + (1 + i)^t
  • NPV = Cash Flow - (1 + i)^t
  • NPV = Cash Flow / (1 + i)^t (correct)

What is the purpose of factoring in short term financing?

<p>To sell accounts receivable to another company at a discounted rate (B)</p> Signup and view all the answers

What is the main source of revenue for a business?

<p>Inventory (A)</p> Signup and view all the answers

What is the primary purpose of a revolving credit agreement?

<p>To borrow money on an ongoing basis (B)</p> Signup and view all the answers

What is the primary purpose of liquidity ratios in finance?

<p>To determine how easily assets can be converted into cash to pay debts (D)</p> Signup and view all the answers

What does a high inventory turnover ratio indicate?

<p>Goods are sold quickly and inventory levels are low (B)</p> Signup and view all the answers

What is the purpose of the debt-to-equity ratio?

<p>To determine the relationship between debts and equity (D)</p> Signup and view all the answers

What is the formula for calculating the return on equity?

<p>Net income - Dividend on preferred shares / Average outstanding shares (C)</p> Signup and view all the answers

What is the definition of net working capital?

<p>Current assets - current liabilities (C)</p> Signup and view all the answers

What is the purpose of the current ratio?

<p>To assess a company's liquidity and ability to pay short-term debts (C)</p> Signup and view all the answers

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