question archive 1) Which of the following statement is CORRECT? Using some of the firm's cash to reduce long-term debt is an example of "window dressing
1) Which of the following statement is CORRECT? Using some of the firm's cash to reduce long-term debt is an example of "window dressing
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1) Which of the following statement is CORRECT?
Using some of the firm's cash to reduce long-term debt is an example of "window dressing."
Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "windows dressing."
Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "windows dressing."
"Window dressing" is any action that improves a firm's functional, long-run position and thus increases its intrinsic value.
Borrowing by using short-term notes payable and then using the proceeds to retire long-term is an example of "windows dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "windows dressing."
2) Which of the following would be most likely to lead to higher interest rates on all debt security in the economy?
The economy moves from a boom to a recession.
Households start saving a larger percentage of their income.
Corporations step up their expansion plans and thus increase their demand for capital.
The level of inflation begins to decline,
The federal Reserve uses monetary policy in an attempt to simulate the economy.
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Answer:
1.
b. Borrowing on a long term basis and using the proceeds to retire short term debt would improve the current ratio and thus could be considered to be an example of "window dressing"
When funds are borrowed using long term securities and the cash is used to pay off short term borrowings the cureent liabilities reduce while the current assets remain te same. This improves the current ratio of the comany andpresents a better liquidity position of the business. In actual borrowing long term funds to pay off short term liabilities disturbs ALM position which is deterimental to the company. However, this transaction presents a better short term picture of the company an is therefore considered "window dressing"
2.
c. Corporations setup their expansion plans and thus increase their demand
When the companys expand, the requirement for funds increase. The suppliers of funds increase their rates in anticipation that the companys would be willing to pay higher rate of interest in view of the necessity of funds. Thus the demand and supply rule would work. Due to higher demand, the price of funds would increase and thus the rates of interest would increase.
