Question

A company wishes to invest in its long-term future growth by buying $100,000 of new manufacturing equipment. Which of the following financing techniques should the company NOT employ in order to pay for the new equipment?

Secure a 6 month note payable at a local bank.

Use internally generated cash on hand (retained earnings).

Sell new shares of the company’s common stock to investors.

Sell 20-year bonds payable.

b.

When the Bad Debt Percentage is calculated, what does management want the percentage to be:

As large as possible because that indicates how much sales has increased from last year.

As small as possible because that suggests that most accounts receivable balances are collectible.

None are correct.

Management does not care about the size of the percentage.

c.

Which of the following ratios helps predict a company’s ability to pay its near-term liabilities?

Days Payable Outstanding

Dividend Payout Ratio

Current Ratio

Operating Profit Margin

Answer 1

A: The company should not employ:

Secure a 6 month note payable at a local bank

The company is purchasing this equipment for long term benefits. Considering that the equipment is costly and would yield returns over the long run, it is not recommend to use shirt term sources of finance to pay for it

B: The management want the percentage to be:

As small as possible because that suggests that most accounts receivable balances are collectible

Bade debt percentage showcases the amount of debtors which cannot pay to the company. Obviously the management would want this figure to be as low as possible

C: The ratio that helps predict a company’s ability to pay its near-term liabilities: Current ratio

Current ratio is Current Assets/Current Liabilities— it measures the ability of an entity to pay its near-term obligations.