Question

For a levered firm, an additional 3-day delay in paying suppliers will

A. reduce the firm’s long-term external financing need.

b.not affect the cash cycle.

c.increase the cash cycle by 3 days.

d.reduce the operating cycle by 3 days.

e.increase the firm’s stock-out costs.

Answer 1

If company delays 3 days in making payment to suppliers, it will increase accounts payable period, which does not affect the operating cycle as operatinf cycle includes only inventory period & receivable period.

As accounts payable period increases by 3 days, the cash cycle will reduce by 3 days, so answers related to cash cycle are wrong.

by delaying payment, stock-out costs are not afffected in anyway, so that is also wrong

so correct answer : Reduce the firm's long term financing need

As firm makes 3 days late payment, to that extent, company will require less funds