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Chapter 3: Q5DQ (page 182)

“The most appropriate financing pattern would be one in which asset build-up and length of financing terms are perfectly matched.” Discuss the difficulty involved in achieving this financing pattern.

Short Answer

Expert verified

This Financing pattern is difficult to achieve as no financial planner can appropriately determine the timing of build-up and length of financing required.

Step by step solution

01

Meaning of financing pattern

This Financing pattern refers to the manner of obtaining the finance for meeting the company’s requirements.This pattern is useful for managing the operational and financial goals of the company.

02

The difficulty in the mentioned financial pattern

The financial planner cannot determine the mentioned financial pattern and for it, the planner should have appropriate information regarding the timing of the asset build-up and the length of financing available at a given time.

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Most popular questions from this chapter

Tobin Supplies Company expects sales next year to be \(500,000. Inventory and accounts receivable will increase \)90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent dividend pay-out. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

What is an asset-backed public offering?

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in Table 6-6.

1-year T bill at the beginning of year 1

6%

1-year T bill at the beginning of year 2

7%

1-year T bill at the beginning of year 3

9%

1-year T bill at the beginning of year 4

11%

Boatler Used Cadillac Co. requires $850,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short term financing instead, he will pay 7.75 percent interest in the first year and 13.55 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly?

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.
See all solutions

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