1. If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
a. True
b. False
2. Other things held constant, the higher a firm's target payout ratio, the higher its expected growth rate should be.
a. True
b. False
3. Which of the following statements is CORRECT?
a. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
b. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
c. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
d. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
e. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.