Chapter 6 Notes - Financial Instruments

Chapter 6 Notes - Financial Instruments - Financial...

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Financial Management – Chapter 6 Characteristics of Funding Debt o A loan, a legal obligation between the company and a lender o The company promises to repay the loan, with interest, over a specified time period o Classified by maturity, legal terms, type of lender Equity o Investment in the company o No repayment promise but ownership in the firm, a share in the company’s future o Classified by ownership privileges – preferred, common Types of Short-Term Debt Trade credit – accounts payable Accruals – spontaneous payables Bank loans Capital market alternatives to bank loans Trade Credit Legal arrangement o Account payable (open account) o Note payable o (Bankers) acceptance Terms of sale o Consignment o Seasonal dating o Monthly billing o Discount, net o Net o Cash on delivery (COD) o Cash before delivery Net credit Net credit = accounts receivable – accounts payable o Net supplier of trade credit (net credit > 0) o Appropriate for large firms with good access to financial markets o Net user of trade credit (net credit < 0) o Appropriate for smaller, financially weak firms without good access to financial markets Accruals o Wages payable, taxes payable, interest payable, etc. o Arise spontaneously through normal business practice o Generally free sources of financing o There could be hidden costs to accruals
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Banks loans o Prenegotiated loans Line of credit – no guarantee funds will be available Revolving credit line guarantee of funds availability normally requires payment of a commitment fee o Offering basis loans – no prior negotiation Loan pricing o Starts with a base rate of interest Prime rate most common base rate in the U.S.
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  • Spring '10
  • Debt, trade credit, capital market alternatives

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