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.
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
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.
Copyright © 2003 Pearson Education, Inc. Slide 15-4
Cost = 2% x 360 = 36.73% 100% - 2% 30 - 10
Spontaneous LiabilitiesGiving Up the Cash Discount
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
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
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
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)
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.
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.
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.
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