Question

9. Which one of these statements is correct? A) A firm's cash cycle generally decreases when it switches from a cash to a credit policy, all else equal. B) A firm may have to increase its long-term borrowing if it decides to grant credit to its customers. C) Most customers will forgo the discount and pay at the end of the credit period. D) Only the cost of default should be considered before granting credit. E) Total revenues generally decrease if both the quantity sold and the price per unit increase when credit is granted.

Answer 1

(C) is correct - For most customers, the credit period is more valuable than the cash discount, and they will avail the credit period. Only a few customers will avail the discount and pay early.

(A) is incorrect. The cash cycle will increase because the days receivable will increase

(B) is incorrect. Short-term receivables will be financed with short-term borrowings

(D) is incorrect. The opportunity cost and increased sales should also be considered

(E) is incorrect. Revenues will increase because both quantity and price have increased