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16 Cards in this Set
- Front
- Back
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What are permanent current assets?
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Those required to operate the business in even the slowest times of the year.
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What are temporary current assets?
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The additional amounts of current assets that are accumulated during periods of higher production and sales.
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What is a conservative approach to current assets?
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To finance permanent current assets with long-term financing sources and finance temporary current assets with short-term financing sources.
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Name three disadvantages of long-term financing sources.
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1. more expensive
2. have more covenants that restrict management actions 3. often have prepayment penalties |
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Name six short-term sources of funds.
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1. accounts payable (trade credit)
2. short-term bank loans 3. commercial paper 4. loans with accounts receivable as collateral 5. debt with inventory as collateral 6. selling derivatives in the financial futures market |
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Name a disadvantage of using accounts payable as a short-term source of funds.
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It can be expensive if the firm does not take advantage of the cash discounts available for early payment of invoices.
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What are a short-term bank loans?
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Loans from financial institutions that typically mature in about 90 days and involve an interest rate tied to the prime rate or the London Interbank Offered Rate (LIBOR).
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What is the nominal rate on a short-term bank loan?
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The prime rate or LIBOR.
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What is the actual rate on a short-term bank loan?
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The prime rate or LIBOR adjusted for the borrower's credit risk.
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How is the interest cost calculated when the loan is made on a discounted basis or involves a compensating balance?
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Divide the interest amount by the cash available (the principal minus the discount or compensating balance).
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What is a line of credit?
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An informal specification of the maximum amount that the bank will lend the borrower.
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What is a letter of credit?
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A promise by an importer's bank that the bank will pay for imported merchandise - it facilitates international trade.
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Who can issue commercial paper to obtain short-term funds?
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Large credit worthy borrowers.
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Name the three ways in which accounts receivable can be used as collateral for short-term loans.
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1. pledging of receivables
2. factoring of receivables 3. asset-backed public offerings |
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Name the three ways in which inventory can be used as collateral for short-term debt.
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1. blanket inventory liens
2. trust receipts 3. warehousing arrangements |
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How can management hedge against interest rate risk if there is a large amount of variable rate debt?
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By selling derivatives in the financial futures market.
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