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Finance Questions

1. What are the two major sources of spontaneous short-term financing for a firm?

2. How do their balances behave relative to the firm's sales?

3. Is there a cost associated with taking a cash discount?

4. Is there any cost associated with giving up a cash discount?

5. How do short-term borrowing costs affect the cash discount decision?

6. What is "stretching accounts payable"?

7. What effect does this action have on the cost of giving up a cash discount?

8. How is the prime rate of interest relevant to the cost of short-term bank borrowing?

9. What is a floating-rate loan?

10. What does a firm have to do, legally before "going public"?

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Spontaneous short term financing is defined as the self generated short term funds during the course of a business. The firm generates spontaneous funds of working capital with the help the credit generated from daily business operations. The two major sources of spontaneous short term financing are bills payable and accruals or outstanding expenses (FINANCING OF WORKING CAPITAL).


If the company purchases on the credit than its creditors, bills payables and outstanding expenses also increases. The increase in the balance of these terms shows an increase in the purchases of the company. The company increases in the purchases because of the increase in the sales for the company. The balance of these liabilities increases with the increase in the sales and decreases with the decrease in the sales of the company. Thus, it is concluded that spontaneous short term financing behave in the positive manner relative to the firm's sales (Van Horne, Wachowicz & Bhaduri, 2008)..


No, there is no cost associated with taking a cash discount because it is the incentives to the customers in the form of cash discount to make early payment before the due date (Current Liabilities Management). For example: The company uses 2/10 net 30 for cash discount. It means that consumer is entitled 2 % cash discount, if he pays within 10 days (discount period) after the beginning of the credit period i.e. 30 days (Van Horne, Wachowicz & ...

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