Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to...

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Copyright © 2003 Pearson Education, Inc. Slide 15-1 Ch 15 Learning Goals 1. Evaluate the decision to take cash discounts on trade credit. 2. Calculate effective annual interest rate on short-term loans. 3. Characteristics of secured short- term loans and the use of current assets as collateral.

Transcript of Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to...

Page 1: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-1

Ch 15 Learning Goals

1. Evaluate the decision to take cash discounts

on trade credit.

2. Calculate effective annual interest rate on

short-term loans.

3. Characteristics of secured short-term loans

and the use of current assets as collateral.

Page 2: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-2

Spontaneous Liabilities

• _________________________ liabilities arise from

the normal course of business.

• The two major spontaneous liability sources are

accounts payable and accruals.

• There is normally no explicit cost of these current

liabilities.

• Accounts payable are a major source of S-T financing for

most firms

Page 3: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-3

Spontaneous LiabilitiesAnalyzing Credit Terms

• If a supplier offers a cash discount, the firm must

decide whether or not to take the cash discount.

• If a firm opts to take a cash discount, it should pay on

the ______________________ of the discount period.

• If a firm chooses to give up the cash discount, it

should pay on the final day of the credit period.

Page 4: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-4

Cost = 2% x 360 = 36.73% 100% - 2% 30 - 10

Spontaneous LiabilitiesGiving Up the Cash Discount

Page 5: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-5

Unsecured Sources of Short-Term Loans

• The major type of loan made by banks to businesses is the short-term loan, intended to meet seasonal needs.

• Short-term bank loans come in three basic forms:

– single-payment _________________

– ______________________________ (LOC)

– ______________________________ credit agreements (RCA)

Bank Loans

Page 6: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-6

Unsecured Sources of Short-Term LoansBank Loans

• Most banks loans are based on the prime rate

• The rate paid by most borrowers is “_______________”

a premium added to the prime rate based on the

borrower’s riskiness.

Loan Interest Rates

Page 7: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-7

Unsecured Sources of Short-Term LoansBank Loans

• On a fixed-rate loan, the rate of interest is determined

when the loan is taken out and remains at that rate until

maturity.

• On a floating-rate loan, the increment above the prime

rate is initially established and the rate then floats with

prime until maturity.

Fixed & Floating-Rate Loans

Page 8: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-8

Unsecured Sources of Short-Term LoansBank Loans

• A line of credit is an agreement between a commercial

bank and a business specifying the maximum amount of

credit the bank will provide over a given period of time.

• A LOC is _________________ guaranteed.

• A revolving credit agreement is similar, but ________

guaranteed.

• Both LOCs and revolving credit agreements often

require compensating balances.

Lines of Credit (LOC)

Page 9: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-9

Unsecured Sources of Short-Term LoansBank Loans

Revolving Credit Agreements (RCA)

• Because a RCA is guaranteed, the bank typically

charges a _______________________________

• Although more expensive than a LOC, the RCA is less

risky from the borrower’s perspective.

Page 10: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-10

Secured Sources of Short-Term LoansCharacteristics

• Collateral reduces the lender’s loss in the case of default

• Lenders prefer to match the life of the collateral with the

life of the loan.

• For short-term loans, accounts receivable and inventory

are frequently used as collateral.

Page 11: Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective.

Copyright © 2003 Pearson Education, Inc. Slide 15-11

Secured Sources of Short-Term LoansCharacteristics

• The loan itself is normally for 30 to 90 percent of the

book value of the collateral.

• The interest rate charged on secured loans is typically

_______________________ than on unsecured debt.

• In addition, lenders often add a service charge for

secured loans.