FIN4320_Lecture_14_Borrowings(42p)

FIN4320_Lecture_14_Borrowings(42p) - Chapter 13 Borrowing...

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Chapter 13 Borrowing
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Corporate Borrowing Strategy and  Objectives Overall Borrowing Strategy Capital is comprised of debt and equity Debt is liability Equity is ownership Leverage is the relationship between debt and equity
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Corporate Borrowing Strategy and  Objectives Capital Structure and Borrowing Strategies Balance Tradeoffs Debt and Equity Short- and Long-Term Debt Fixed and Variable Debt Secured and Unsecured Debt On- and Off-Balance Sheet Financing
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Corporate Borrowing Strategy and  Objectives Short-Term Borrowing Objectives Maintain Available Credit Minimize the Cost of Funds Minimize Risk Maintain Flexibility
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Corporate Borrowing Strategy and  Objectives Long-Term Borrowing Issues Long-Term Debt versus Equity Equity Financing Issues Advantages No obligated fixed payment No maturity date Disadvantages Extends voting rights to more people Underwriting costs Venture Capital
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Variables Affecting the Cost of  Borrowing Loan Pricing Base Rates Prime Rate LIBOR Other Base Rates Credit Risk Credit Support Standby LC Asset Backing Term to Maturity
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Variables Affecting the Cost of  Borrowing Loan Pricing Cost of Borrowing Base Rate Spread Basis Point 1% = 100 basis points .01% = 1 basis point .0001 = 1 basis point Adjustment for risk, based on credit ratings May be reduced with credit enhancements All-In Rate = Base Rate + Spread
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Short-Term Borrowing Alternatives Line of Credit Agreement where borrow has access to funds up to a limit for a specified period of time Often requires a “Cleanup” period where no borrowing can occur May be secured or unsecured
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Short-Term Borrowing Alternatives Line of Credit Characteristics Committed Formal loan agreement, legal obligation of financial institution Often requires fee or balance compensation Cannot be canceled by financial institution during the LOC period Uncommitted Can be canceled at anytime by the financial institution Often for one year or less Often informal, not a legal obligation for lender
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Short-Term Borrowing Alternatives Line of Credit Characteristics Revolving Security May be secured or unsecured Cleanup Usually only for small- and medium-sized companies
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Short-Term Borrowing Alternatives Line of Credit Effective Rate All-in Rate Commitment fee Based on unused portion or total LOC Paid quarterly Compensating Balance Effective Annual Borrowing Cost (EABC)= (Total Interest and Fees/Average Usable Funds) X (365/Days Loan Outstanding)
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Line of Credit Effective Cost Assume: Average loan is $2,000,000 LOC is for $5,000,000
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This note was uploaded on 04/02/2009 for the course DEPARTMENT FIN 4320 taught by Professor Sherwoodbishop during the Spring '08 term at Southwestern.

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FIN4320_Lecture_14_Borrowings(42p) - Chapter 13 Borrowing...

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