Suggested Solutions for Tutorial 7

Suggested Solutions for Tutorial 7 - 1 Suggested Solutions...

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1 Suggested Solutions for Tutorial 7 Please note that following suggested solutions are only very basic points and you need to read the textbook and other reference materials for better understanding. 1. Briefly discuss the term differences between short-term and medium- to long-term debt finance. Are these distinctions useful? short-term debt is the term used for those types of loans and instruments through which a company can raise debt finance for a period as short as a day, and up to one year short-term debt is appropriate for financing short-term working capital requirements and investments that are self-financing within the short period of time the use of short-term debt is also appropriate for firms that experience seasonal peaks and troughs in their net cash flows sources of short-term debt include trade credit, overdrafts, commercial bills, promissory notes, inventory loans, accounts receivable finance and factoring medium- to longer-term debt is generally in the form of instruments issued with an initial maturity greater than one year types of medium- to longer-term debt instruments include term loans, mortgage finance, debentures, unsecured notes and leasing the distinction between short-term and medium- to longer-term debt is useful in understanding the matching principle. The matching principle contends that short-term assets, such as inventories and operating expenses, should be funded with short-term liabilities, while longer- term assets, such as buildings and equipment, should be funded with longer-term liabilities and equity the money markets (short-term) and capital markets (medium- to longer-term) facilitate the matching principle in relation to funding, whereby the cash flows associated with a source of funds (liabilities) are able to be matched over the life of the cash flows of the use of funds (assets). This occurs because the markets provide a whole range of products with varying
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This note was uploaded on 08/30/2011 for the course AFF 1000 taught by Professor Chalmers during the Three '11 term at Monash.

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Suggested Solutions for Tutorial 7 - 1 Suggested Solutions...

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