Corporate Finance – Chapter 8

Accounts payable is a Spontaneous source of funds, and current liability
40% of short term financing is in the form of accounts payable or trade credit
Trade credit is usually extended for 30 to 60 days
Cash Discount allows a reduction in prices if payment is made within a specified time period
Cost of failing to take a cash discount formula (Discount Percent / 100% – Discount %) x (360 / Final Due Date)
Net Trade Credit the relationship between accounts payable and accounts receivable
Larger firms tend to be Net providers of trade credit (relatively high receivables)
Smaller firms tend to be in the User position (relatively high payables)
Self-liquidating loan the use of funds will ensure a built-in or automatic repayment scheme
Gramm-Leach-Bliley Act of 1999 Allowed commercial and investment banks to merge
Prime Rate the rate a bank charges its most creditworthy customers and it usually increases as a customers credit risk gets higher
LIBOR London Interbank Offered Rate
Compensating Balance required for the business to either pay a fee for the service or maintain a minimum average account balance
Amount to be borrowed forumla Amount Needed / (1 – c)
Effective Rate Formula (Interest / Principal) x (Days in the year (360) / Days load in outstanding)
Term Loan Credit is extended for one to seven years and repaid in monthly or quarterly installments over its life rather than one payment
Effective Rate on Discounted Loan Formula (Interest / Principal – Interest) x (Days in Year / Days loan in outstanding)
Discounted Loan Interest is deducted in advance (effective rate of interest increases
Effective Rate with Compensating Balances Forumla Interest / (1 – c)
Alternative Effective Rate with Compensating Balances Forumla Interest / Principal – Compensating Balance in dollars) x (days in year / days loan is outstanding
Installment Loan calls for a series of equal payments over the life of the loan
Annual Percentage Rate (APR) Measure of the effective rate we have presented; it requires the use of the actuarial method of compounding interest
Commercial Paper represents a short-term, unsecured promissory note issued to the public in minimum units of 25,000
Finance Paper (direct paper) sold directly to the lender by the finance company
Dealer Paper industrial, utility, or financial companies use an intermediate dealer network to distribute their paper, therefore, its called dealer paper
Asset-Backed commercial paper commercial paper that is backed by a specific pledge of assets. This is an exception to the normal case in which commercial paper is unsecured; third type and relatively new
Book-entry Transactions computerizing the handling of commercial paper with this process in which no actual certificate is created
Advantages of commercial paper It may be issued below the prime rateNo compensating balance requirements are associated with its issuancePrestige associated with being able to float their commercial paper in what is considered a snobbish market for funds
Limitations on the Issuance of Commercial Paper Many lenders have become risk-averse post a multitude of bankruptcies
Euro-Dollar Loan A loan denominated in dollars and made by a foreign bank holding dollar deposits
Companies using a euro dollar loan must be aware of the currency risk
Currency Risk the value of foreign funds borrowed may rise against the dollar and it will then take more time to repay
Pledging accounts receivable using it as collateral for a loan or an outright sale (factoring) of receivables
Factoring Receivables the process of selling receivables outright to the finance company
Asset-back securities Nothing more than the sales of receivables
Blanket Inventory Liens specific items are not identified or tagged, and there is no physical control
Trust Receipt instrument acknowledging that the borrower holds the inventory and proceeds from sales in trust for lender
Floor Planning Arrangement used to finance inventory. A finance company buys the inventory, which is then held in trust by the user.
Warehousing goods are physically identified, segregate, ad stored under the direction of an independent warehousing company
Financial Future Market is set up to allow for the trading of a financial instrument at a future point in time

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