Chapter 27, Problem 1P

Summary Introduction

To determine: The company which has high short-term financing needs.

Introduction:

Many small-scale businesses need short-term financing rather than long-term financing; that is, for the period of one year. Seasonal businesses are most likely to have short-term financial needs for their kind of business.

Explanation of Solution

Given information:

The given companies:

a) A clothing retailer,

b) A professional sports team,

c) An electric utility,

d) A company that operates toll roads,

e) A restaurant chain.

Explanation:

The companies which are not likely to have high short-term financing needs are as follows:

An electric utility is a company, which operates toll roads, and a restaurant do not have high short-term financing needs as they are not seasonal parties. These companies will have profits and losses throughout the period and not in a particular season.

Hence, options c), d), and e) companies do not have high short-term financing needs.

The companies which are likely to have high short-term financing needs are as follows:

A professional sports team and clothing retailer are likely to have high short-term financing needs. This is because these companies have seasonal markets and they need finance during the non-profitability period. Professional sports team needs finance to advertise, purchasing equipment, and sell tickets post-season.

A clothing retailer needs more finance to handle the negative cash flow shock. For example, if the retailer purchases unwanted stocks (that is, unrelated products), then the shortfall has to be borne by him; he will need more finance for the upcoming season.

Hence, options a) and b) are likely to have high short-term financing needs.