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MAS reviewer

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ANGEL ROSAL
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2 views16 pages

Document

MAS reviewer

Uploaded by

ANGEL ROSAL
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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IDS 4 FUN) IRCES OF SHORT TERM soul ' ferm. 9, What is meant by short-l : ‘ ing is use Short-term finance ad financing |S SS oe rr ar, Short-terit ents and S s intermediate and ong tg = a5 see msc depends largely on man inant nd firm’s 0! le is lar ma ripe : ni erm financing is often jeg. Nene vide funds Lie . used to provi | hi y ‘ ever, SI ce ens ies, How ncing. ive risk-return SE aa longer-term fina . , and more flexible sencountered in managing the firms Use lem: ancing? Anes +t cheduled tor re, riginally sc! ym pro to finance all or part My + it refers 10 de to met OF sh, basic probl "4 Peeing, These ae . ing the firm should | eo he level of short-term financing Nd Use, ang ae le" | 1, determining the ncing. 2. selecting the source of short-term financing. 3 Ss hi in selecting from mong the alter, What are the factors to be consicaree in sel 1g fr tera short-term financing opportunities. ‘These factors are: tive cost of credit, 4 / en oo of retin the amount needed and forthe petod jg when financing is required, : : 3 tis influence of the use of a particular credit source on the Cost and ‘ availability of other sources of financing, and 4. any additional covenants of the loans that are unique to the Sources mentioned previously. 31. What are the sources Of short-term funds? Short-term funds can be obtained throu, loans. They are either Spontaneous or n Spontaneous sources (Sources arisi A 7 ions) ng from ordinary business transaction a. Accruals Bh 7 b. Trade Credit Non-spontaneous SOUFCES (sources irin ic jation) 8. short-term ban} requiring special effort or negoti b. line of ¢ redit k loans (secured of unsecured) ©. Commercial Papers igh either unsecured credit or secured egotiated. assignment of accounts rece} site oF accounts receivable eivable ae orn ans with: 7 (0 or blanket lien gh fiotsel mortgage ; chal yarehouse financing agreement : fe inal warehouse receipt te ’ ans cost OF SHORT TERM Funps ru the cO st of short-term credit estimated? f i gr qqaures ine he are current liabilities for services i en received but for which F A let? payments have not been made as of the Teporting date. Accruals .stimating the cost of short-term credit are: of taxes, rent and interest payabl i cotrude wages faxes. te able. Accruals are interest-fre as ; of financing and do not involve either implicit or explicit ets st alter the amount of accrued wages by changing the frequency rms ca? of wage payments, but they have less control over other accruals. Credit. Credit received during the di iod i ost of Trade : during the discount period is orretimies called free trade credit. The view that trade creitis free may a misleading. There are costs associated with trade credit, but they are not as obvious as costs of other forms of financing, such as interest charges- « Implicit/Hidden costs. Suppliers of trade credit incur the costs of operating a credit department and financing account receivables. They pass these costs on to buyers in the price of the product or service. However, this is determinable if the cash price is known. © Opportunity costs/missed cash discount, Trade credit does not have explicit cost if there is no discount offered or if the buyer pays the invoice during the discount period. However, if the terms of sale include a discount and the discount is not taken, an opportunity cost is incurred because the buyer forgoes an opportunity to pay less for the purchases. In essence, the discounted value is the selling price. When the buyer fails to pay within the discount period, the amount of the discount lost is the cost of not paying the discounted value Until the end of the remaining portion of the discounted period. Nori ne Discount percent | 360 days n Days credit is._ Discount Cost (a * 100 - Discount percent (ANC) outstanding period c. Cost of za see are calculated in five ways; Interest on ban! t Simple Interest Discount nee Add-on Interes Simple Interest w! Discount Interest ffective annual rate are as follows. ? mpute the ef S: Equations to col ith Compensating Balances with Compensating Balances VPwnNo ris pivai loan, the borrower receives the face in . a Vah Joan and repays the principal and interest at Maturity date“ oy Formula to compute the effective interest rate is; S Interest Effective annual rate simple Face value 2. Discount Interest Ina discount interest loan, the bank deducts the interest in a \dVance 5 or discounts the loan. The formula to compute for the effective anny rate is 7 lan Interest Effective annual rate iscount Face Value - interest 3. Add-on Interest Add-on interest is interest that Teceived to determine the face am Formula: 1, Approximate annual Tate add-on = _2 X Annual No. of Payments x Interest = ema XO. of payments x Interest (Total No. of payments + 1) x Principal nual interest rate, use the table for te 5 f | with consideration to the number 0! st rate per period. is calculated and added to funds ount of an installment loan, To compute for the effective an Present value of an annuity of Periods and the Nominal intere: 4. Simple Interest with compensating balance ding Compensating balance ig thé minimum account balance that a led : ank requires the borrower to maintain. Its effect is to rais® effective rate unt is | ona loan because the net withdrawable amoutt ® | Teduced, | e annual rate simpiescy = fectiy Interest "Face value - Comege —— oe mpensating balance psective annual rate simple/cp = Nominal rate (%) 10 - Compensating balance % ount interest with compensating balance Diset to compute for the . 5 formula to compute for the effective a « TH «count basis is innual rate if the loan is on a Interest Face value — Interest — Compens: ating balance or 2 Nominal rate (%) 1.0 - Nominal Interest - Compensating balance rate cost of | Commercial Paper 4 To calcul: papers the late the effective cost of credit, through issuance of commercial following formula may be used: Effective annual rate discount = Interest + Issue Costs 1 x = tes - Interest - Issue Costs Days to maturity Face value of the no’ ae PART B. Multiple Choice Review Questions and Problem, WORKING CAPITAL MANAGEMENT AND FINANCING DECISIoy 1. Investment instruments used to invest temporarily idle cash b . Inv ewe alan, should have the following characteristics: es ili hort ter i marketability, and a sl ™ to man. a high expected sotums eat marketable, and no maturity gain, b. high expected return, readily mar ‘i's short term t c,

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