Week6 finance

Week6 finance - 8/24/2009 Learning Objectives FINS1612 Week...

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8/24/2009 1 FINS1612 Week 6 SHORT TERM DEBT Learning Objectives Overview of the characteristics of various forms of short-term debt Main types Sources Reasons and patterns of use Advantages and disadvantages for borrowers and lenders Chapter Organisation 9.1 Trade Credit 9.2 Bank Overdrafts 9.3 Commercial Bills 9.4 Calculations: Discount Securities 9.5 Promissory Notes 9.6 Negotiable Certificates of Deposit 9.7 Inventory Finance, Accounts Receivable Financing and Factoring 9.8 Summary 9.1 Trade Credit Short-term debt is a financing arrangement for a period of less than one year with various characteristics to suit borrowers’ particular needs Timing of repayment, risk, interest rate structures (variable or fixed) and the source of funds Matching principle Short-term assets should be funded with short-term liabilities 9.1 Trade Credit (cont.) A supplier provides goods or services to a purchaser with an arrangement for payment at a later date Often includes a discount for early payment (e.g. 2/10, n/30, i.e. 2% discount if paid within 10 days, otherwise the full amount is due within 30 days) 9.1 Trade Credit (cont.) The opportunity cost of the purchaser foregoing the discount on an invoice (1/7, n/30) is (9.1) p.a. 16.03% or 0.160298 23 365 99.0 1.0 settlement late and early between difference days 365 discount % 100 discount % cost y Opportunit
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8/24/2009 2 Chapter Organisation 9.1 Trade Credit 9.2 Bank Overdrafts 9.3 Commercial Bills 9.4 Calculations; Discount Securities 9.5 Promissory Notes 9.6 Negotiable Certificates of Deposit 9.7 Inventory Finance, Accounts Receivable Financing and Factoring 9.8 Summary 9.2 Bank Overdrafts Major source of short-term finance Allows a firm to place its cheque (operating) account into deficit, to an agreed limit Generally operated on a fully fluctuating basis Lender also imposes an establishment fee, monthly account service fee and a fee on the unused overdraft limit 9.2 Bank Overdrafts (cont.) Interest rates negotiated with bank at a margin above an indicator rate, reflecting the borrower’s credit risk Financial performance and future cash flows Length of mismatch between cash inflows and outflows Adequacy of collateral Indicator rate typically a floating rate based on a published market rate, e.g. BBSW In some countries overdraft borrower may be required to hold a credit average balance or compensating credit balance Chapter Organisation 9.1 Trade Credit 9.2 Bank Overdrafts 9.3 Commercial Bills 9.4 Calculations: Discount Securities 9.5 Promissory Notes 9.6 Negotiable Certificates of Deposit 9.7 Inventory Finance, Accounts Receivable Financing and Factoring 9.8 Summary 9.3 Commercial Bills A bill of exchange is a discount security issued with a face value payable at a future date A commercial bill is a bill of exchange issued to raise funds for general business purposes
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Week6 finance - 8/24/2009 Learning Objectives FINS1612 Week...

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