1. As the difference between the costs of short- and long-term debt becomes smaller, which financing plan, aggressive or conservative, becomes more attractive?

2. Why is no single working capital investment and financing policy necessarily optimal for all firms? What additional factors need to be considered in establishing a working capital policy?

3. a. Which of the following working capital financing policies subjects the firm to a greater risk?

i. Financing permanent current assets with short-term debt

ii. Financing fluctuating current assets with long-term debt

b. Which policy will produce the higher expected profitability?

4. Define and discuss the function of collateral in short-term credit arrangements.

5. How is the annual financing cost for a short-term financing source calculated? How does the annual financing cost differ from the true annual percentage rate?

6. Explain the difference between spontaneous and negotiated sources of short-term credit.

7. Under what condition or conditions is trade credit not a "cost-free" source of funds to the firm?

8. Define the following:

a. Accrued expenses

b. Deferred income

c. Prime rate

d. Compensating balance

e. Discounted loan

f. Commitment fee.