FMchap16 - Chapter 16 Financing Current Assets LEARNING...

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After reading this chapter, students should be able to: Identify and distinguish among the three different current asset financing policies. Briefly explain the advantages and disadvantages of short-term financing. List the four major types of short-term funds. Distinguish between free and costly trade credit, calculate both the nominal and effective annual percentage costs of not taking discounts, given specific credit terms, and explain what stretching accounts payable is and how it reduces the cost of trade credit. Describe the importance of short-term bank loans as a source of short- term financing and discuss some of the key features of bank loans. Calculate the effective interest rate for (1) simple interest, (2) discount interest, (3) add-on interest loans; and explain the effect of compensating balances on the effective cost of a loan. List some factors that should be considered when choosing a bank. Explain why large, financially strong corporations issue commercial paper, and why this source of short-term credit is typically less reliable than bank loans if the firm gets into financial difficulties. Define what a “secured” loan is and what type of collateral can be used to secure a loan. Learning Objectives: 16 - 1 Chapter 16 Financing Current Assets LEARNING OBJECTIVES
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This chapter is relatively short, and students can read and understand most of it on their own. Also, since we have only one chapter on financing current assets, we try to go all the way through it. Assuming that you do cover the entire chapter, the details of what we cover, and the way we cover it, can be seen by scanning Blueprints , Chapter 16. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes. DAYS ON CHAPTER: 3 OF 58 DAYS (50-minute periods) Lecture Suggestions: 16 - 2 LECTURE SUGGESTIONS
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16-1 The more seasonal the business, the more variation in its asset requirements. While short-term credit could theoretically be used to match maturities with the fluctuating level of required current assets, uncertainty about the exact pattern of seasonal flows might dictate a more prudent policy of maintaining some sort of safety stock of liquid assets financed by longer-term sources of funds. 16-2 If an asset’s life and returns can be positively determined, the maturity of the asset can be matched to the maturity of the liability incurred to finance the asset. This matching will ensure that funds are borrowed only for the time they are required to finance the asset and that adequate funds will have been generated by the asset by the time the financing must be repaid. A basic fallacy is involved in the above discussion, however.
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This note was uploaded on 05/29/2011 for the course HRM 100 taught by Professor Elijahchen during the Spring '11 term at Abraham Baldwin Agricultural College.

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FMchap16 - Chapter 16 Financing Current Assets LEARNING...

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