1. ©2012 McGraw-Hill Ryerson Limited 1 of 23 Learning Objectives 1.Characterize trade credit as an important form of short-term financing and calculate its cost to the firm if a discount is forgone (LO1) 2.Describe bank loans as self-liquidating, as short-term, and as having their interest cost tied to the prime rate. Also, calculate interest rates under differing conditions. (LO2)

2. ©2012 McGraw-Hill Ryerson Limited 2 of 23 Cost of Financing Alternatives When a financial manager needs to choose from several financing alternatives, the cost – the interest rate – often is the deciding factor. The interest rate, “r”, is calculated on an annual basis. LO1

3. ©2012 McGraw-Hill Ryerson Limited 3 of 23 Sources of Short-Term Financin g Trade Credit from Suppliers Bank Loans Commercial Paper (Promissory Notes) Bankers’ Acceptances Foreign Borrowing Loans Against Receivables and Inventory LO1

4. ©2012 McGraw-Hill Ryerson Limited 4 of 23 Figure 8-1 Structure of corporate debt, 2011 LO1 Source: Statistics Canada, Financial Statistics for Enterprises” Catalogue 61-008, 2 nd quarter 2011.

5. ©2012 McGraw-Hill Ryerson Limited 5 of 23 Trade Credit Largest source of short-term financing for a firm Trade payables are a spontaneous source of funds Usually a 30-60 day grace period before a bill is due LO1

6. ©2012 McGraw-Hill Ryerson Limited 6 of 23 Trade Credit Cash discount allows for a reduction in price if payment is made within a specified time –ex: 2/10 net 30 On a $100 billing, we could pay 98$ up to the 10th day or wait 20 more days and pay $100. The cost of forgoing the discount = LO1

7. ©2012 McGraw-Hill Ryerson Limited 7 of 23 Net Credit Position Net Credit Position = Accounts Receivable (A/R) minus Accounts Payable (A/P) if A/R are greater than A/P, the firm is a net provider of trade credit (positive number) if A/P are greater than A/R, it is a net user of trade credit (negative number) larger firms tend to be net providers of trade credit, while smaller firms are net users LO1