Question

Aa Aa 12. Short-term financing Why use short-term financing? Cash flows from operations may not be sufficient for a firm to keep up with growth-related financing needs, or the firm may not be able to always generate enough cash flow to maintain a surplus of cash. Firms prefer to borrow now to fulfill their capital requirements through means of short-term financing or long-term financing. Both methods have their advantages and disadvantages. The following statement identifies a possible characteristic of short-term financing Consider this case: Flotation costs for short-term loans are relatively lower than long-term loans Identify whether the preceding statement is true or false. O This statement is false and a disadvantage of short-term financing. This statement is true and an advantage of short-term financing. Firms use a variety of short-term financing sources to support working capital. Use the descriptions in the following table to identify the short-term financing source. Short-Term Financing Source Description A formal, committed line of credit extended by a bank or other lending institution Unsecured, short-term promissory notes issued by large firms in denominations of $100,000 or more

Answer 1

1. The statement is true and is an advantage of short term financing

2.

(I) Revolving credit agreement

(ii) Commercial paper