Exam 8: Sources of Short-Term Financing

A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 3.5/9, net 25. What change might be expected on the balance sheets of its customers?

A trade discount is a percentage reduction from the invoice price given for purchasing certain minimum quantities.

Lending disclosure laws are designed to protect

Holland Construction Co. has an outstanding 180-day bank loan of $400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its chequeing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount.

From the banker's point of view, short-term bank credit is an excellent way of financing

Securitized paper

Small companies finance a relatively greater proportion of their assets through trade credit than do larger concerns.

The cost of not taking the discount on trade credit of 3/10, net 30 is equal to

The cost of forgoing the discount on trade credit of 1/10, net 30 is equal to

One of the disadvantages of commercial paper is that if the company's credit quality declines, the issuance of additional paper may be impossible.

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

The cost of forgoing the discount on trade credit of 4/10, net 25 is equal to

The prime rate

The banks have been significant issuers of asset-backed securities.

Slipshod Machine Tool Co. owes $40,000 to one of its suppliers. The supplier has offered a trade discount of 2/10 net 30. Slipshod can borrow the funds from either of two banks. First City Bank will loan the funds for 20 days at a cost of $400. Upstart Bank offers a discounted loan for 20 days at a cost of $320. A) What is the cost of failing to take the discount? B) What is the annual interest rate on each of the loans? C) Which alternative should Slipshod follow?

Francis Construction Co. has an outstanding 180-day bank loan of $600,000 at an annual interest rate of 8%. The company is required to maintain a 20% compensating balance in its chequeing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount.

Which method of controlling pledged inventory provides the greatest degree of security to the lender?

What is a compensating balance and what is its purpose? Is it commonly used? Why or why not?

The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.

Net credit position refers to