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Unformatted text preview: September 2003 FIN2101 BUSINESS FINANCE II MODULE 6 - SOURCES OF FINANCE QUESTION 1 What are the two most important characteristics of trade credit as a source of short-term finance? Where does management's discretion lie in the use of trade credit? QUESTION 2 What inducement would there be for a new customer buying $10 000 worth of product to take advantage of the discount if terms of 2.5/30, n/60 were offered, ie what is the cost of not taking the discount? Assume 365 days per year . QUESTION 3 Why is delaying payment to suppliers and foregoing discounts offered often an expensive form of finance? Illustrate for a company with a 20% overdraft rate in receipt of a $10 000 invoice on which 3/7, n/30 discount terms have been offered, ie what is the cost of foregoing the discount? Assume 365 days per year . QUESTION 4 Explain the advantages and disadvantages of the short-term funding strategy of "stretching" accounts payable. QUESTION 5 Why might a company prefer to use a temporary 3-month overdraft facility of $100 000 costing 20% per annum instead of a fixed 90-day loan costing 18% per annum? QUESTION 6 What is the essential difference between a commercial bill and a promissory note? QUESTION 7 What are the advantages (to the company) of a private placement of ordinary shares? Why might existing shareholders dislike or object to such an issue? September 2003 QUESTION 8 Bailey Shoes Limited has 3 million ordinary $1 shares on issue and has decided to make a 1- for-3 renounceable rights issue at $1.85 to finance expansion into the Perth and Brisbane markets. The issue will be underwritten by Ware Partners for $40 000. Immediately following the announcement of the issue, Bailey Shoes shares were trading at $2.25. (a) What is the theoretical value of the right to one new share and the theoretical value of Bailey's shares ex rights?...
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