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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?

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

What is the main source of revenue for a business?

Inventory (A) Signup and view all the answers

What is the primary purpose of a revolving credit agreement?

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

What is the primary purpose of liquidity ratios in finance?

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

What does a high inventory turnover ratio indicate?

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

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

To determine the relationship between debts and equity (D) Signup and view all the answers

What is the formula for calculating the return on equity?

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

What is the definition of net working capital?

Current assets - current liabilities (C) Signup and view all the answers

What is the purpose of the current ratio?

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

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