Business Finance Ch.8

Business Finance Ch.8 - b. Increases the cost of borrowing...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
 February 27, 2008 Ch. 8 Source of S-T financing I. Trace credit – accounts payable A. Largest source of S-T financing B. Spontaneous  C. Discount  Cost of discount not taken 2% discount > 2/10, net 30 > bill must be paid within 30 days Pay within 10 days 2%/(100%-2%) x (360 days)/(30-10) = 2.04% x 18 = 36.72% II. Bank credit A. Banks prefer 1. Self liquidating loans 2. Project itself pays the loan B. Bank loan terms and concepts 1. Prime rate – interest rate charged to the most credit worthy borrowers. 2. London interbank offer rate (LIBOR) – based on the U.S. dollar deposits  in offshore accounts.  3. Compensating Balances a. Borrower or refusal to leave a % of the borrowing in the bank. 
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: b. Increases the cost of borrowing c. Forces firms to borrow more than they need 4. Cost of bank financing a. Effective interest 1. Loan amount 2. Interest paid 3. Length of loan 4. Method of payment b. Effective rate Interest/principal interest x 360 days/ days of the loan Effective rate = interest/P-CB x 360/days of the loan III. Commercial paper A. A 1. Issue at below prime 2. Avoid compensating balance IV. Freeze borrowing A. Euro dollar loan foreign loans denominated in the US dollar. B. Sub borrow many denominated in the foreign currency, converted to dollar and loaned to the US parents....
View Full Document

This note was uploaded on 04/29/2008 for the course FINA 10100 taught by Professor Markert during the Spring '08 term at Ithaca College.

Page1 / 2

Business Finance Ch.8 - b. Increases the cost of borrowing...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online