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Under its new management nsc members trained like

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Under its new management, NSC members trained likecommandos and were prepared to go anywhere and doanything. They saved people from drowning, fought fires,found lost bushwalkers, and went down mines. Their lavishequipment includedhelicopters, eight aircraft, and amini submarine. Soon, the NSC began selling its servicesinternationally.Unfortunately, the NSC’s paramilitary outfit cost millionsof dollars to run—far more than it earned in revenue.Friedrich bridged the gap by borrowing $Amillion ofdebt. The banks were happy to lend because the NSC’sdebt appeared well secured. At one point, the companyshowed $Amillion of receivables (i.e., money owed by itscustomers), which it pledged as security for bank loans.Later checks revealed that many of these customers did notowe the NSC a cent. In other cases, banks took comfort inthe fact that their loans were secured by containers of valuable rescue gear. There were more thancontainersstacked around the NSC’s main base. Only a handful contained any equipment, but these were the ones that theFinancein PracticeThe Hazards of Secured Bank Lendingcompanies have found it profitable to bypass the bank and to sell short-term debt,known ascommercial paper,directly to large investors.In the United States commercial paper has a maximum maturity of 270 days becauselonger maturities would require registration with the Securities and ExchangeCommission. Most paper matures in 60 days or less. Commercial paper is notsecured, but companies generally back their issue of paper by arranging a specialbackup line of credit with a bank. This guarantees that they can find the money torepay the paper, and the risk of default is therefore small.Recent years have not been kind to the commercial paper market. When LehmanBrothers went bankrupt in 2008, it defaulted on its outstanding commercial paper.The commercial paper market seized up; many companies either found it impossibleto issue commercial paper or were obliged to pay very high rates of interest.The resulting interruption of credit to the corporate sector was a major cause ofthe recession that followed the financial crisis. Even before the crisis, however, allwas not well. In 2001, two large California utilities—Pacific Gas & Electric andSouthern California Edison—became the first companies for 10 years to default ontheir nonfinancial commercial paper.commercial paperShort term unsecurednotes issued by firms.SUMMARYThe most important current assets are cash, marketable securities, accounts receivable, andinventories. The most important current liabilities are bank loans and accounts payable.Net working capital results from the lags between the time that the firm obtains the rawmaterials for its product and the time that its customers pay for their purchases. Thecashcycleis the length of time from thepaymentfor these raw materials to the date that thecustomers pay their bills.

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Term
Fall
Professor
NoProfessor
Tags
Finance, Net Present Value, Weighted average cost of capital

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