Exam 16: Managing Short-Term Liabilities Financing

Inventory financing can take the form of a

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Firms having difficulty borrowing short-term funds from banks can raise short-term funds by issuing commercial paper.

Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.

Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt.

Coverall Carpets Inc.is planning to borrow R12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments.What is the effective rate of interest on the 12 percent discounted loan?

Viking Farms harvests crops in roughly 90-day cycles based on a 360-day year.The firm receives payment from its harvests sometime after shipment.Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest.If the firm requires R60,000 in proceeds from each note, what must be the face value of each note?

Suppose you borrow R2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan).Also assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value.What effective annual interest rate are you being charged?

When deciding whether or not to take a trade discount, the cost of borrowing funds should be compared to the cost of trade credit to determine if the cash discount should be taken.

If a firm fails to take trade credit discounts it may cost the firm money, but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

The uniform commercial code is a system of standards that simplifies procedures for establishing loan security.

Picard Orchards requires a R100,000 annual loan in order to pay laborers to tend and harvest its fruit crop.Picard borrows on a discount interest basis at a simple annual rate of 11 percent.If Picard must actually receive R100,000 net proceeds to finance its crop, then what must be the face value of the note?

Do not use the approximation formula for this problem.Coverall Carpets Inc.is planning to borrow R12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments.What is the effective rate of interest on the 10.19 percent add-on loan?

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

A firm is offered trade credit terms of 3/15, net 45.The firm does not take the discount, and it pays after 67 days.What is the approximate annual cost of not taking the discount?

Which of the following functions does the factor (lender) purchasing accounts receivable normally perform?

Inland Oil arranged a R10,000,000 revolving credit agreement with a group of small banks.The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment.On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual simple interest basis.The prime rate was at 9 percent for the year.If Inland borrowed R6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total rand cost of the loan agreement for one year?

Assume that Sunshine Products Inc.has an agreement with Shady Finance Company to factor its receivables.Shady charges a flat commission of 2 percent of the receivables factored, plus 6 percent a year interest on the outstanding balance.It also deducts a reserve of 10 percent for returned and damaged materials.Interest and commission are paid in advance.No interest is charged on the reserve or the commission.If the average level of outstanding receivables is R700,000, and if they are turned over 4 times a year (hence the commission is paid 4 times a year), then what is the effective quarterly interest rate charged by Shady for this arrangement?

A firm is offered trade credit terms of 2/8, net 45.The firm does not take the discount, and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

You need to borrow R25,000 for one year.Your bank offers to make the loan, and it offers you three choices: (1) 15 percent simple interest, annual compounding; (2) 13 percent simple interest, daily compounding (360-day year); (3) 9 percent add-on interest, 12 end-of-month payments.The first two loans would require a single payment at the end of the year, the third would require 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate?