1. Current Liabilities Management
Week 7

2. Spontaneous Liabilities
Sources
Accounts Payable
Accruals (wages and taxes)

3. Spontaneous Liabilities: Accounts Payable Management
Average payment period
Payment float time
Credit terms
Cash discount

4. Spontaneous Liabilities: Analyzing Credit Terms (cont.)
Cost of Giving Up the Cash Discount

5. Spontaneous Liabilities: Analyzing Credit Terms (cont.)
Cost of Giving Up the Cash Discount

6. Spontaneous Liabilities: Analyzing Credit Terms (cont.)
Calculation
Supplier Credit Terms
X 1/10 net 55 EOM
Y 2/10 net 30 EOM
Z 2/20 net 60 EOM
Calculate the cost of giving up cash discount from each supplier.
Assuming that the firm needs short term financing, indicate whether it would be better to give up the cash discount or take it and borrow from bank at 15% annual interest.

7. Spontaneous Liabilities: Effects of Stretching Accounts Payable
Supplier Credit Terms
Y 2/10 net 30 EOM
Postpone the credit period to 50 days from 30.

8. Unsecured Sources of Short-Term Loans:
Bank Loans
Commercial Paper
Self-liquidating
Types:
single-payment notes
lines of credit
revolving credit agreements.

9. Unsecured Sources of Short-Term Loans: Bank Loans (cont.)
Loan Interest Rates
Prime rate of interest
Premium
Types of Loans:
Fixed Rate Loans
Floating Rate Loans

10. Unsecured Sources of Short-Term Loans: Bank Loans (cont.)
Method of Computing Interest
Nominal rate
Effective rate of interest
If interest rate is paid at maturity:

11. Calculation
If interest rate is paid at maturity:
$10,000, 90 day loan at an interest rate of 15% p.a. payable at maturity.
How much interest will be paid on 90 day loan?
Find effective 90 day rate on the loan
Find the effective annual rate if the loan is rolled over every 90 days throughout the year.

12. Unsecured Sources of Short-Term Loans: Bank Loans (cont.)
If the interest is paid in advance (discount loans)

13. Effective Rate Calculation
A financial institution made a $10,000, 1 year discount loan at 10% interest. Determine the effective annual rate associated with this loan.

14. Unsecured Sources of Short-Term Loans: Bank Loans (cont.)
Single Payment Notes
A single-payment note is a short-term, one-time loan payable as a single amount at its maturity.

15. Calculation
Bank A Bank B Loan Amount $100,000 $100,000 Premium Rate 1.5% 1% Interest type Fixed Floating Loan Period 90 days 90 days Prime Rate 9% 9% 9.5% 9.25%

16. Unsecured Sources of Short-Term Loans: Bank Loans (cont.)
Line of Credit (LOC)
Loan Amount is not guaranteed
Floating rate
Operating- Change restrictions
Compensating Balance
Annual Cleanups

17. Calculation
A financial institution made a $10,000, 1 year discount loan at 10% interest, requiring compensating balance equal to 20 % of the face value of the loan. Determine the effective annual rate associated with this loan.

18. Unsecured Sources of Short-Term Loans: Bank Loans (cont.)
Revolving Credit Agreement (RCA)
Guaranteed line of credit
Commitment fees

19. Unsecured Sources of Short-Term Loans: Commercial Paper
Commercial paper - unsecured promissory note
Sold at a discount form par value.
3 to 270 days
Interest rate < Prime rate
Other costs (rating cost, line of credit, floatation costs etc)

20. Unsecured Sources of Short-Term Loans: International Loans
Exchange Rate Risk
Letter of Credit
Transactions between Subsidiaries

21. Secured Sources of Short-Term Loans: Characteristics
Collateral does not reduce the riskiness of default on a loan.
Life of the loan and maturity of collateral.
Loan amount is 30 and 100 percent of the book value of the collateral.
rate of interest on secured loans > interest on unsecured debt.

22. Secured Sources of Short-Term Loans
The Use of Accounts Receivable as Collateral
Pledging accounts receivable
Value adjustment of acceptable A/R accounts
lend between 50 and 90 percent of the face value of acceptable receivables.
Lien on the collateral
Notification Vs Non-Notification
Cost of pledge > Prime Rate

23. Secured Sources of Short-Term Loans (cont.)
The Use of Accounts Receivable as Collateral
Factoring accounts receivable
Factors (credit collection agencies)
Loss absorbance
Notification basis

24. Secured Sources of Short-Term Loans (cont.)
The Use of Inventory as Collateral
Marketability of Inventory
Types:
Floating Liens – stable inexpensive inventory, <50% of BV,
3% to 5 % above Prime Rate
2. Trust Receipt – Expensive inventory, Lein, % of BV, 2% or more above Prime Rate
3. Warehouse Receipt – Inventory under lender’s control, % of BV, 3% to 5 % above Prime Rate, Other costs