Chap008 - Chapter 08: Sources of Short-Term Financing...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 08: Sources of Short-Term Financing Chapter 8 Sources of Short-Term Financing Discussion Questions 8-1. Under what circumstances would it be advisable to borrow money to take a cash discount? It is advisable to borrow in order to take a cash discount when the cost of borrowing is less than the cost of foregoing the discount. If it cost us 36 percent to miss a discount, we would be much better off finding an alternate source of funds for 8 to 10 percent. 8-2. Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why? Larger firms tend to be in a net creditor position because they have the financial resources to be suppliers to credit. The smaller firm must look to the larger manufacturer or wholesaler to help carry the firm’s financing requirements. 8-3. How have new banking laws influenced competition? New banking laws allowed more competition and gave banks the right to expand across state lines to create larger, more competitive markets. They also increased bank mergers. 8-4. What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate? The prime rate is the rate that a bank charges its most creditworthy customers. The average customer can expect to pay one or two percent (or more) above prime. 8-5. What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate? LIBOR stands for London Interbank Offered Rate. As indicated in Figure 8-1, it is consistently below the prime rate. 8-1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Chapter 08: Sources of Short-Term Financing 8-6. What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporate borrowers? The use of a compensating balance or minimum required account balance allows the banker to generate a higher return on a loan because not all funds are actually made available to the borrower. A $125,000 loan with a $25,000 compensating balance requirement means only $100,000 is being provided on a net basis. This benefit to the lender need not be a disadvantage to the borrower. The borrower may, in turn, receive a lower quoted interest rate and certain gratuitous services because of the compensating balance requirement. 8-7. Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement. Commercial paper can be either purchased or issued by a corporation. To the extent one corporation purchases another corporation’s commercial paper as a short-term investment, it is a current asset. Conversely, if a corporation issues its own commercial paper, it is a current liability. 8-8. What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/31/2012 for the course FINC 3343 taught by Professor Terry during the Spring '11 term at University of Arkansas at Little Rock.

Page1 / 28

Chap008 - Chapter 08: Sources of Short-Term Financing...

This preview shows document pages 1 - 3. Sign up to view the full document.

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