1. we are asked that:

1. Explain why trade credit from suppliers is a "spontaneous source of funds."

2. Trade credit from suppliers is a very costly source of funds when discounts are lost. Explain why many firms rely on this source of funds to finance their temporary working capital.

3. Stretching payables provides "free" funds to customers for a short period. The supplier, however, can face serious financial problems if all of its customers stretch their accounts. Discuss the nature of the problems the supplier may face, and suggest different approaches to cope with stretching.

4. Suppose that a firm elected to tighten its trade credit policy from "2/10, net 90" to "2/10, net 30." What effect could the firm expect this change to have on its liquidity?

5. Why are accrued expenses a more spontaneous source of financing than trade credit from suppliers?

6. Why is the rate on commercial paper usually less than the prime rate charged by bankers and more than the Treasury bill rate?