Business 357 Business Finance BEAN UMA exam 2 chapter 6,7,8,9,

Check clearing for the 21st century Act of 2003

(referred to as the Check 21 Act) This Act allow banks and other to process checks electronically.

permanent current assets

-Current Assets that will not be reduced or converted to cash within the normal operating cycle of the firm maintain normal operation the result of business persons failure to realize the firm is carrying not only self liquidation inventory but also the anomaly of permanent current assets page 158

#1 Cash discount Compute the cost of not taking the following cash discount. a) 2/10, net 50 b) 2/15, net 40 c) 3/10, net 45 d) 3/10, net 180 page 244

2/10, net 50 cash discount 2%x360 days= 7.2 ____________________ 100% -2%=0.98 x (50-10)=40 so 7.2/0.392=18.36% cost of lost discount page 244

compounded semiannually

A compounding period of every six months. For example, a five-year investment in which interest is compounded semiannually would indicate an n value equal to 10 and an i value at one-half the annual rate. page 292

# 15 Economic ordering Quantity with safety stock Diagnostic Supplies has expected sales of 135,000 units per year, a carrying cost of $ 3 per unit, and an ordering cost of $ 4 per order.

A what is the economic order quantity? eoq squared 2sc/c= sq 2x135,000expected sales x ordering cost/3 carrying cost=600units B. What is average inventory? What is the total carrying cost? 600 units from (a) and divide eoq 2 600/2=300units this is average inventory then 300 units x 3 carrying cost = 900 to get total carrying cost. C. Assume an additional 80 units of inventory will be required as safety stock. What will the new total carrying cost be? eoq/2 +80 units =380 x 3 carrying cost per year = 1,140 total carrying cost.

#18 long term financing/ short term financing Break-even point in interest rates Interest costs under alternative plans Carmen's beauty salon has estimated monthly financing requirements for the next six months as follows: January $8,000 February $ 2,000 March $3,000 April $ 8,000 May $ 9,000 June $ 4,000 Short- term financing will be utilized for the next six months. Projected annual interest rates are: A) compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly interest payments. B. If long term financing at 12 % had been utilized throughout the six months, would the total dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part A.

A) short tem Jan 8% /12months=.67%x8,000=53.63 feb 9%/12months=.75%x2,000= 15.00 march 12%/12 months= 1.00%x3,000=30.00 april 15%/ 12months= 1.25%x 8,000=100.00 may 12%/12 months= 1.00% x 9,000=90.00 june 12%/12 months = 1.00%x4,000=40.00 _________________ 328.60 total the amounts this equals interest rate short term to get monthly rate /12 0,8/12=.67% B) long term Jan 12%/12 months =1%x8,000=53.60 Feb 12%/12months=1%x2,000=20.00 March 12%/12months=1%x3,000=30.00 april 12%/12 months= 1%x 8,000=80.00 may 12%/12months=1%x 9,000=90.00 june 12%/12months=1%x4,000=40.00 _______________ 340.00 Greater long term

#5 Level versus seasonal production October 1,000 November 2,0000 December 4,000 January 3,000 total units 10.000 Antonio Banderos and Scarves makes head-wear that is very popular in the fall-winter seasons. Units sold are anticipated as: if seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup, However, Antonio decides to go with level production to avoid being out of merchancise, He will produce the 10,000 items over four months at a level of 2,500 per month. a) what is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total. B) If the inventory costs $5 per unit and will be financanced at the bank at a cos of 12 percent, what is the monthly financing cost and the total for the four of 12 percent, what is the monthly financing cost and the total for the four months? ( use 1 percent or the monthly rate)

A)Units sold units purchased change in inventory ending inv 1,000 2500 +1500 =1500 2000 2500 +500 =2000 4000 2500 -1500 =500 3000 2500 -500 =0 0 B) Cost ending env total cost per unit inventory financing cost $5 per unit at (1%) per month) 1500 x5 7500 x1% +75 2000 x5 10,000 x1% +100 500 x5 2500 x1% +25 0 0 0 ___________ total financing cost $200

# 8 Accounts receivable balance Barney;s antique shop has annual credit sales of $1,080,000 and an average collection period of 40 days. Assume a 360 day year. What is the Company's average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

ACCOUNTS RECEIVABLE BALANCE Barney's antique shop 1,080,000 annual credit sales /360 commercial days=3,000 credits sales a day to get the companies average accounts receivable balance do this: take: 3,000 average daily credit sales x 40 average collection period (give 40 Days) =120,000average accounts receivable balance

Spontaneous source of funds

Accounts payable is spontaneous source of funds, growing as the business expands o a seasonal or longer basis and contracting in a like fashion when business declines. page 226

An Actual Credit Decision additions sales 10,000 assume an analysis of our accounts indicates a turnover ratio of 6 to 1 between sales and accounts receivable ( this tells us in the actual credit decision so use this formula)

Accounts receivable = sales3/turnover=10,000/6=1,667 page 226 we are commiting an average investment to only 1,6667 to provide an after tax return of $480 so that the yield is a very attractive 28,8 %. If the firm had a minimum requirement after tax return of 10 percent, this would clearly be an acceptable investment. we might ask next if we should consider taking on 12% or even 15% in collectible accounts remaining loyal to our concept of maximizing return on investment and forsaking any notion about risky accounts being inherently good or bad. page 226 and 227

#9 Credit Policy finding the days In problem 8 if accounts receivable change to $ 140.000 while credit sales are $1,440.000, should we assume the firm has a more or a less lenient credit policy? Hint: recompute the average collection period.

Accounts receivable balance (credit policy) finding the days.... so, formula: account receivable/average daily credit sales first take credit sales/ by 360 economical days then divide: account receivable 140,000/4000 which is credit and comm days= 35 days

#11 Aging of accounts receivable Route canal shipping company has the following schedule for aging of accounts receivable: age of receivable April 30, 2010 month sale age of acct amounts %of amount due april 0-30 105,000 march 31-60 60,000 Feb 61-90 90,000 Jan 91-120 45,000 total receivables 100%

Ageing of accounts receivable a) % for amount due for april march feb jan to get the % divide the given amount in(3) by the give amount of total receivables april amount 105,000/300,000=35% march amount 60,000/300,000=20% february amount 90,000/300,000=30% January amount 45,000/3000,000= 15% ________ total % 100% b) If the firm had $ 1,440,000 in credit sales over the four- month period compute the average collection period. average daily sales should be based on a 120 day period ( 4 months 30days x 4 months=120) collection period average collection period=accounts rec'/average daily credit sales so do the average daily credit sales /by the days first 1,440,000/120=12,000 then divide 300,000 accounts rec'/by 12,000=25 days c) If the firm likes to see its bills collected in 30 days should it be satisfied with the average collection period. yes, because its paid in 25 days d) disregarding your answer to part c and considering the aging schedule for accounts receivable should the company be satisfied? No, the aging schedule provides additional insight that 65% of the accounts receivable is over 30 days old. e) what additional information does the aging schedule bring to the company that the average collection period may not show? it goes beyond showing how many days of credit sales accts rec' represent to indicate the distribution of acct rec' between various time frames.

Certificate of deposit (CD)

Another outlet for investment is certificate of deposit offered by commercial banks, savings and loans, and other financial institutions. The investor places his funds on deposit at a specified rate over a given time period as evidenced by the certificated received. this is a two tier market with small CD's ( $500 to 10,000) carrying lower interest rates while larger CD;s ($100,000 and more) have higher interest provisions and a degree of marketability for to those who wish to sell their CD's before maturity. guaranteed by federal government for up to 250,000. page 219

Hedging

means to engage in a transaction that partially or fully reduces a prior risk exposure. page 260

Self liquidating assets

Assets that are converted in to cash within the normal operating cycle of the firm. page 158

# 5 Average collection Sanders's Prime time company has annual credit sales of $ 1,800,000 and accounts receivable of $ 210,000. Compute the value of the average collection period

Average collection period compute the value of the average collection period find the annual credit sales (1,800,000) find the accounts receivable (210,000) we know 360 is a commercial year use formula: annual credit sales/ 360 commercial yrs (this first to get answer) then place under accounts receivable and divide average collection period= accounts receivable ____________________ annual credit sale total with comm yr =210,000/5000=42 days this is the answer

commercial paper

Comparable in yield and quality to large certificates of deposit, Commercial paper represents unsecured promissory notes issued to the public by large business corporations. commercial paper is held to maturity by the investor with no active secondary market in existence. page 219

5 Cs of Credit

Bankers refer to the 5 Cs of credit character, capital, capacity, conditions, and collateral as an indication of whether a loan will be repaid on time, late or not at all. Character - the moral and ethical quality of the individual who is responsible for repaying the loan. a person of principle or a company run by people of high ethical standards is expected to be good credit risk. Capital- is the level of financial resources available to the company seeking the loan and involves an analysis of debt to equitably and the firm's capital structure. Capacity refers to the availability and sustainability of the firm's cash flow at a level high enough to pay off the loan. Conditions- refers to the sensitivity of the operating income and cash flows to the economy. some industries such as automobiles, chemicals and paper are quite cyclical and exhibit wide fluctuations in cash flows as the economy moves through the economic cycle of contraction and expansion. the more sensitive the cash flow to the economy the more the credit risk of the firm. Collateral- is determined by the assets that can be pledged against the loan. much as an automobile serves as collateral for a care loan or a house for a mortgage, companies can pledge assets that are available to be sold by the lender if the loan is not repaid. page 221 and 222

# 1 Cost benefit analysis of cash management Beth's Society clothiers, Inc. has collection centers across the country to speed up collections. The company also makes payments form remote disbursement centers so the firm's checks will take longer to clear the bank. Collection time has been reduced by two and one-half days and disbursement time increased by one and one-half days because of these policies. Excess funds are being invested in short-term instruments yielding 6 percent per annum. A) If the firm has $ 4,000,000 million per day in collections and $ 3,000,000 million per day in disbursements, how many dollars has the cash management system freed up? B) How much can the firm earn in dollars per year on short-term investments made possible by the freed-up cash?

Beth's Society Colthier's Inc A) $4,000,000 per day in collections and 3,000,000 per day in disbursements, how many dollars has the cash management system freed up? reduced by 2 1/2 days speed up so, 4,00,000 daily collection x 2.5 speed up additional collection =10,000,000 and 3,000,000 daily collection x 1.5 days slow down=4,500,000 delay disbursements therefore: 10,000,000 speed up adddional collections +4,500,000 delay disbursements ___________ 14,500,000 freed up funds B) Earnings in dollars from freeded funds are: the 14,500,000 (freed up funds) x the 6% given to use in problem( interest rate) _______________________________________________ 70,000 Interest on freed up cash on annual bases...

Cost benefit analysis

an efficiently maintained cash management program can be an expensive operation. the sue of remote collection and disbursement centers involves additional costs and banks involved i the process will require that the firm maintain adequate deposit balances r pay sufficient fees to justify the services. these expense must be compared to the benefits that may accrue through the use of cost benefit analysis. page 214

# 19 Breaking even point interest rates IN problem 18 what long term interest rate would represent a break even point between using short-term point between using short term financing as described in part a and long term financing ? hint: Divide the interest payment in 18a by the amount of total funds provided for the six months and multiply by 12.

Carmens beauty Salon cont... divide the total interest payments in part (A) of 328.60 (problem 18 ) By the total amount kof funds extended 340.00 total montly interest part 328.60/340 principal=/.966% month rate then 12 x .966 % =11.59 % is the annual rate

Carrying Costs

Carriyng costs include interest on funds tired up in inventory and the costs of warehouse space, insurance premiums, and material handling expenses. ther is also an implicit cost associated with the dangers of obsolescence or perishability and rapid price change. the lager he order we place the greater the average inventory we will have on hand and the higher the carrying costs.

#7 short-term versus longer-term borrowing Boatler used Cadillac Co. requires $800,000 in financing over the next two years. The firm can borrow the funds for tow years at 9 % interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing instead, he will pay 6.75 % interest in the first year and 10.55 % interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly?

Cost two year fixed cost financing 800,00 borrowed @ 9% per x 2years = 144,000 interest cost less risk Cost of two year variable short-term financing 1 st year 800,000 x 6.75% per annul =54,000 interest cost 2 nd year 800,000 x 10.35 % per annul = 84,400 interest cost total interest cost 138,400 more risk this is the more risky variable......

#17 Credit policy decision Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $ 100,000 if credit is extended to these new customers. Of the new accounts receivable generated 10% will prove to be uncollectible. Additional collection costs will be 79 % of sales. The firm is in the 40% tax bracket.

Credit policy decision before taxes (annual incremental) A) compute the incremental income after taxes SET UP FROM PROBLEM: Additional Sales (given) 100,000 (to get next step 100,000x10%=10,000) 1000,000 Acct uncollectible - 10,000 ______________________ annual incremental revenue 90,000 collection cost (3% of new sales) -3000 (1000,000X3%) production and selling costs - 79,000 (1000,000x79) _________________ annual income before taxes 8,000 Taxes (40%) (tax bracket) -3,200 (8,000x40%) _______________ Incremental income taxes after taxes 4,800 B) what will Johnson's incremental return on sales be if these new credit customers are accepted? Incremental return on sales=incremental income/incremental sales 48,00 in part (a)/additional sales 1000,000= 48% C) If the receivable turnover ratio is 6 to1 and no other asset buildup is needed to serve the new customers, what will Johnson;s incremental return on new average investment be? Receivable turnover receivables = sales /receivable turnover =6x 1000,000 sales/6= 16,666.67 incremental return on new average investment= 480/16,666.67=28.80 the 48%/16,666.67

#1 Chapter 6 Frank Bean UMA business Finance 6.1 Chapter 6 part 3 page 200 Expected value Austin Electronic expects sales next year to be $900,000 if the economy i strong, 650,000 if the economy is steady and 355,000 if the economy is weak. The firm believes there is a 15 percent probability the economy will be strong, a 60 percent probability of a steady economy and a 25percent probability of a weak economy. What is the expected level of sales for next year?

EXPECTED Value: Setup Chart with columns ________Austin Electric___________________________________ state of Sale probability expected economy Next year the firm believes outcome _______________________________________________________________ __Strong_____________900,000____x___.15____=____+135,000 __steady______________650,000____x___.60____=____+390,000 __Weak_______________375,000____x___.25___=_____+93,750 Expected level of sales _______________________ =618,750

#3 6. 1 chapter 6 PART 3 PAGE 200 EXTERNAL FINANCING Axle Supply Co. expects sales next years to be 300,000. Inventory and accounts receivable will increase by 60,000 to accommodate this sales level. The company has a steady profit margin of 10 percent with a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur will the external financing. OCTOBER 1,000 NOVEMBER 2,000 DECEMBER 4,000 JANUARY 3,000 TOTAL UNITS 10,000

EXTERNAL financing 300,000 Sales .10 Profit margin ___________ 30,000 net income -90,000 dividends (30%) _________ 21,000 Increase in retained earnings 60,000 Increase in assets -21,000 Increase in retained earnings ___________ 39,000 external funds needed

#4 Effective rate of interest your bank will lend you $2,000 for 45 days at a cost of $25 interest. What is your effective rate of interest?

Effective rate of interest

Lock box system

Expedites cash inflows by having a bank receive payments from a company's customers directly via mailboxes to which the bank has access. expeditious check clearance at lower costs. page 213

money market fund

Of particular interest to the smaller investor is the money market fund. a product of the tight money periods of the 70's and 80's for $500-1,000 and investor could purchase shares in a money market fund, in turn reinvests the proceeds in higher yielding 100,000 bank CD's 25,000 to 100,000 commercial paper and other large denomination, higher yielding securities. page 220 investors received shares daily.

Automated clearing houses (ACH)

are an important element in electronic funds transfers. an ACH transfers information between one financial institution and another and from account to account via computer tape 18 regional automated clearinghouses in the US page 215

Short term financing

Funds needed for a year or less the money needed to pay for the current operating activities of a business interest rates on short term funds is lower than that on long term funds. page 187

Level production

In this strategy for adjusting capacity, the firm uses inventory to absorb fluctuations in demand; The extra cost incurred here is carrying inventory method to smooth production schedules and us manpower and equipment efficiently at lower cost page 159 producing at a constant rate and using inventory as needed to meet demand

Asset backed securities

are nothing more than the sale of receivables. in former years companies that sold receivables were viewed as short of cash, financially shaky or in some financial trouble. Credit Card Balances, Auto Loans, Receivables, etc NOI = net operating income

#12 Matching asset mix and financing plans Winfrey Diet Food Corp. Has $ 4,5000,000 in assets. temporary current assets 1,000,000 permanent current asssets 1,500,000 fixed assests 2,000,000 total assets ____ 4,500,000___ Short term rates are 8%, long ter rates are 13 %. Earnings befor interest and taxes are $ 960,000. The tax rate is 40 % . IF long ter financing is perfectly matched (synchronized ) with long term asset needs and the same is true of short term financing, what will earnings after taxes be? For example of perfectly matched plans see figure 6-5 on page 168.

Long-term financing equal 1,500,000 permanent current assets -2,000,00 ____________ 35,00,000 short term financing equals temporary current assets 1,000,000 Long-term interest expense = 13%x 3,500,00= 455,000 Long-term interest expense = 8% x 1000,000= +80,000 ____________ total interest expense 535,0000 Earnings before interest and taxes 960,000 less interest expenses - 535,000 ___________ earnings before taxes (EBT ) 425,000 taxes (40%) give to us x EBT = -170,00 ____________ earnings after taxes 255,000

#12 Economic ordering quantity Midwest Tires has expected Sales of 12,000 tires this years an ordering xost of $6 per order, and carrying costs of $1.60 per tire.

Midwest tire company Economic ordering quantity a) What is the economic ordering quantity? EOQ____ ______ |/ 2SO/C=|/2x12,000x6 _____________ =300tires 1.60 b)How many orders will be placed during the year divide the expected sales by the economic ordering sales in (a)total 300 12,000/300=40 c) what will the average inventory be. divide total tires sold by EOQ which is 2 300/2=150

future value

measure the value of an amount that is allowed to grow at a given interest rate over a period of time $1 x (1+current interest rate) FV=future value PV = present value i= interest value n= number of periods the simple formula is: FV=PV(1+i)^n page 276

Treasury Bills

are short term obligations of the federal government and are a popular place to Park funds because of a large and active market. theirs securities are originally issued with maturities of 91 days and 182 days the investor may buy an outstanding T-bill with as little as one day remaining (perhaps tow prior investors have held it for 45 days each. page 219

basis points

Represents 1/100th of a percent the increase over time is 3.3 percent or 330 basis point the top line on the chart indicates the yield curve for the same time span one year earlier. page 190

Banker's acceptances

are short term securities that arise from foreign trade. the acceptance is a draft drawn on a bank for payment when presented to the bank. the difference between a draft and a check is that a company does not have to deposit fund s at the bank to cover the draft until the bank has accepted the draft for payment and presented it to the company. page 219

Ordering costs

as a second factor, consider the cost of ordering and processing inventory into stock. if we maintain a relatively low average inventory in stock we must order many times and toal ordering costs will be high. as the order size increases , carrying costs go up because we have more inventory on hand. with larger orders we will order less and overall odering costs will go down.

self-liquidating loan

banks provide funds for the financing of seasonal needs, product line expansion and long term growth. The banker prefers a self liquidating loan the use of funds will ensure a built in or automatic repayment scheme page 245 proceeds of the loan are used to acquire assets that will generate enough cash to repay the loan

future value of an annuity

The amount of money that accumulates at some future date as a result of making equal payments over equal intervals of time and earning a specified rate of interest over that time period. page 278

Cash Flow cycle

cash balances are largely determined by cash flowing through the company on a daily, weekly, and monthly basis as determined by the cash flow cycle. The regular pattern of inflows and outflows of cash within a business page 209

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 page 252- 253

Discounted loans

Total borrowing = Amounted needed / (1.0 - stated rate) If the bank uses a discounted loan and deducts the interst in advance, the effective rate of interest increases. Example a 1,000 one year loan with $60 of interest deducted in advance represents the payment of interest on only $940 or an effective rate of 6.38 %. Effective rate on discounted loan= interest/principal x days in the (360)/principal -interest x days loan is outstanding= $60x360=$60/1,000-$60x360=940 $60/$940= 6.38%

Term loan A ___ is also known as a zero amortization loan or a straight loan

credit is extended for one to seven years. The loan is repaid in contently or quarterly installments over its life rather than in one single payment. page 248 (when the entire principal is repaid in one lump sum a zero amortization loan.

pledging accounts receivable

When a firm uses its accounts receivable as collateral, or security, to obtain a short-term loan as collateral for a loan or an outright sales ( factoring) of receivables. Receivable financing is popular because it permits borrowing to be tied directly to the level of asset expansion at any point in time. page 255 drawback is that is it is an expensive method of acquiring funds.

Interest costs with compensating Balances

When a loan is made with compensating balances, the effective interest rate is the stated interest rate divided by (1-c) where c is the compensating balance expressed as a decimal Assume that 6% is the sated annual rate annual rate and that a 20% compensating balance is required. effective rate with compensating balances = interest /(1-c) 6%/(1-0.2)=7.5% in the prior example if dollar amounts are used an the stated rate is unknown use this formula: the assumption is that we are paying $60 interest on a 1,000 loan, but are able to use only $800 of the funds. the loan is for a year. effective rate with compensating balances=interest x daysin the year (360)=/principal -compensating balance in dollars x days loan is outstanding = answer/answer= final answer use this...... 60 x 360=60 then 1,000-200x 360=800 divide 60/800=7.5% page 249

Just-in- time inventory management (JIT)

designed for Toyota a JIT program has several basic requirements: 1) quality production that continually satisfies customer requirements 2) close ties between suppliers, manufacturers, and customers, 3) minimization of the level of inventor suppliers are located near manufactures and are able to fill orders in small lot sizes because of short delivery times page 231

financial futures market

is set up to allow for the trading of a financial instrument at a future point in time. page 60

Prime rate

is the rate a bank charges its most credit worthy customers and it usually increase as a costumers credit risk gets higher. at certain slack loan periods in the economy or because of international competition banks may actually charge top customers less than the published prime rate however such activities are difficult to track. page 246 rate of interest that banks charge on loans to their best business customers

Working capital management

a firm's short-term assets and liabilities the financing and management of the current assets of the firm page 158

Eurodollar loan

a loan that is denominated in dollars and made by foreign bank holding deposits; these loans are usually short-term to intermediate in maturity page 254

Installment loan

a loan to be repaid in a certain number of payments with a certain interest rate calls for a series of equal payments over the life of the loan. Assume that you borrow $1,000 on a 12 month installment basis, with regualr monthly payments to apply to interest and principal and the interst requirment is $60. while it might be suggested that the rate of the loan is 6% this is clearly not the case. Though you are paying a total of $60 in interst , you do not have the us of $1,000 for one year rather, you are paying back the $1,000 on a monthly basis, with an average outstanding loan balance for the year of approximately $500. the effective rate of interst is 11.08%. Effective rate on installment loan=2xannual no. of payments x interest _____________________________________________________ = (total no. of payments + 1) x principal =2 x 12 x $60 $1,440 _______________= ___________ = 11.8% 13 x $1,000 $ 13,000 page 250

safety stock

a safety stock will guard against late deliveries die to weather, production delays, equipment breakdowns and theother thing that can go wrong average inventory= EOQ /2 +safety stock

Commercial paper

a short term unsecured promissory note issued to the public in minimum units of $25,000. falls in three categories: 1) there are finance companies such as general motors acceptance corporation (GMAC) and general electric credit that issue paper primarily to institution investors such as pension funds, insurance e companies and money market mutual funds it is probably the growth of money market mutual funds that has had such a great impact on the ability of companies to sell an increase amount of commercial paper in the market

Electronic funds transfer

a system in which funds are moved between computer terminal without the use of a check page 214

Trust receipts

a trust receipt is an instrument acknowledging that the borrower holds the inventory and proceeds from sales in trust for the lender. each item is carefully marked and specified by serial numbers. when sold the proceeds are transferred to the lender and the trust receipt is canceled. page 258 also know as floor planning financing device is popular auto and industrial equipment dealers television and home appliance industries

cash discount

allows a reduction in price if payment is made within a specified time period . a 2/10 , net 30 cash discount means we can deduct 2% if we remit our funds 10days after billing cost of failing to take a cash discount= discount % /100%-discount % x360/ final due date - discount period 2%/100%-2% x360 / (30-10)=2-04% x18 = 36.72% page 244 a deduction that a vendor allows on the invoice amount to encourage prompt payment

#10 Optimal policy Mix Assume that Hogan Surgical Instruments Co Has $20,000,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18% but with a high-liquidity plan, the return will be 14 %. If the firm goes with a short term financing plan, the financing costs on the $ 2,000,000 will be 10% and with a long term financing plan the financing costs on the $2.000,000 will be 12%. review table 6-11 on pg 178 for parts a,b and c of this problem.

each one do low liquidity x % A) (Most Aggressive) Low liquidity 2,000,000 x 18%= 360,000 Short-term financing 2,000,000x 10%= -20,000 __________________ Anticipated return 160,000 b) (Most Conservative) High liquidity 2,000,000 x 14% = 280,000 long term financing 2,000,000 x 10% = - 240,000 _____________ anticipated return 40,000 C) Moderate approach low liquidity 2,000,000 x 18% = 360,000 Long term financing 2,000,000 x 12% = -240,000 _____________ anticipated return 120,000 d) High liquidity 2,000,000 x 18% = 280,00 short term financing 2,000,000 x 12% = -20,000 ________________ anticipated return 80,000 the greater the risk the less chance of getting what you what.

Interbank offered rate LIBOR

for those companies with an international presence or those sophisticated enough to us the London Eurodollar market for loans. page 246 Interbank lending rates, such as LIBOR, are frequently used as a reference rates for floating rate debt

Public Warehousing Field warehousing

goods are stored on the premises of the warehousing firm and arrangement known as public warehousing or on the borrowers premises under a field warehousing agreement when fields warehouse is utilized it is still an independent warehousing company that exercises control over inventory. page 258

collection policy

in assessing collection policy a number of quantitative measures may be applied to the credit department of the firm. a) average collection period = accounts receivable _______________________ average daily credit sales an increase in the average collectin period may be the result of a predetermined plan to expand credit terms or the consequence of poor credit administration. b) Ratio of bad debts to credit sales an increasing ratio may indicate too many weak accounts or an aggressive market expansion policy. c) aging of accounts receivables aging of accounts receivable is one way of finding out if customers are paying their bills within the time prescribed in the credit terms. if there is a buildup in receivables beyond normal credit terms cash inflows will suffer and more stringent credit terms and collection procedures may have to be implemented. an aging schedule is presented to illustrate the concept. page 225

interest factor

in determing the future value we will change or formula from FV= PV(1+i)^n to FV=PVxFV if where FV if equals the interest factor found in the table ability to generate additional funds through investment and interest accumulation is what helps to keep premium payments lower for the majority of insureds

Compensating balance As part of the terms of its loan with National City Bank, Castro Mill must maintain a daily average of $200,000 in a non-interest bearing account. This is called ____

in providing loans and other services a bank may require that business customers either pay a fee for the service or maintain a minimum average account balance, referred to as a compensating balance. page 246 The amount that must be borrowed to end up with the desired sum of money is simply figured by taking the needed funds and dividing by (1-c), where c is the compensating balance expressed as a decimal. example if you need $1000,000 in funds you must borrow $125,000 to ensure the extended amount will be available. 20% interest rate this will be calculated as followed: amount to be borrowed= amount needed/(1-c) 1000,000/(1-0.2)=125,000 Compensating Balance- the portion of an unsecured loan that is kept on deposit at a lending institution to protect the lender and increase the lender's return

data universal number system (D-U-N-S)

is a unique nine-digit code assigned by Dun & Bradstreet information Services (DBIS) to each business in its information base.page 223 the DUN number can be used to track whole families of companies that are related through ownership

International electronic funds transfer

is mainly carried out through SWIFT . SWIFT is an acronym for society for world wide inter bank financial telecommunications 2009 swift provided around the clock international payments between 9281 financial institiutions in 209 countries. page 215

Term structure of interest rates

is often referred to as a yield curve it shows the relative level of short term and long term interest rates at a point in time. the relationship between interest rates and the term to maturity, where risk of default is held constant page 189

Sweep account

is one such account that allows companies to maintain zero balances with all their excess cash swept into all interest earning account page 216

economic ordering quantity

minimun point (M) on the total cost curve use formula EOQ squared 2SO/C EOQ is the economic ordering quantiy the most advantageous amount for the firm to order each time. We will determine this valu translate it into average inventory size and determine the minimum total cost amount (M) the term in the EOQ formula are defined as follows: S= total sales in units O= ordering cost for each order C = carrying costs per unit in dollars l\assume that we anticipate selling 2,000 units it will cost us $8 to place each order and the price per unit is $1 with a 20 % carrying cost to maintain the average inventory, resulting in a carrying charge per unit of $0.20. plugging these values into formula we show. EOQ= _/ -------- 2SO/C=-/------- 2x2,000x8/0.20=-/------- 32,000/.020=--/-- 160,000= 400 units the optimum order size is 400 units on the assumption that we will use up inventory at a constant rate throughout the year our average inventory on hand will be 200 units page 229

Money market accounts

modeled after the money market funds , due to deregulation, financial institutions are able to pay competitive market rates on money market deposits accounts. there is not a federally prescribed minimum balance, the normal minimum is 1,000 . terms vary from institution to institution. three deposits and three withdrawals per month. and not meant to be transaction accounts. page 220

finance paper

paper sold by financial firms such as GMAC is referred to as finance paper. since it is sold directly to lender by the finance company it is also referred to as direct paper the SECOND type of commercial paper is sold by industrial companies, utility firms or financial companies too small to have their own selling network. these firms use an intermediate dealer network to distribute their paper and so this type of paper is referred to as dealer paper. THIRD - Commercial paper and a relative new comer on the block is asset-backed commercial paper page 252

Dun & Bradstreet information services DBIS

produces business information analysis tools, publishes reference books, provides computer access to information contained in its intentional database of more tha 40 million businesses DBIS has a large staff of analysts constantly updating information from public and private sources. detailing the line of business net worth size of the company size of the company the year in business management and more, report (BIR) is its cornerstone produces many different reports its Business information report (BIR) product and credit decision support tool. DBIS is know for its credit scoring reports that rank company's payment habits relative to its peer group. page 222

Federal agency securities

represent the offering of such governmental organizations as the federal Home loan Bank and student loan marketing association. page 219 though lacking the direct backing of the US treasury they are guaranteed by the issuing agency and provide all the safety that one would normally require. There is an excellent secondary market for agency securities that allows investors to sell and outstanding issue in an active liquid market before the maturity date. Government agency issues pay slightly higher yields than direct Treasury issues.

expected value

represents the sum of the expected outcomes under two conditions. the average of each possible outcome of a future event, weighted by its probability of occurring page 194

Liquidity premium theory

states that long term rates should be higher than short term rates. this premium of long term rates over short term rates exists because short term securities have greater liquidity and therefore higher rates have to be offered to potential long-term bond buyers to entice them to hold these less liquid and more price sensitive securities. page 189

Net trade credit

ther firm should closely watch the relationship between the two to determine its net trade credit position. Net trade credit is positive when accounts receivable are greater than accounts payable and vice versa. page 245 A measure of the relationship between the firm's accounts receivable and accounts payable. If accounts receivable exceed accounts payable, the firm is a net provider of trade credit; otherwise, it is a net user.

Float

there are actually two cash balances of importance : the corporation's recorded amount and the amount credited to the corporation by the and the difference between the two is called float.. page 213

expectation hypothesis

this theory explains the yields on long term securities as a function of short term rates. the expectations theory says long term rates reflect the average of short term expected rates over the time period that the long term security is outstanding . page 189 States the yields on long-term treasuries are based on investors' expectation of future interest rates

Long term financing

to protect against the danger of not being able t provide adequate short term financing in tight money periods, the financial manager many rely on long term funds to cover some short term needs page 186 money that will be used for longer than one year

present value

the amount of money you would need to deposit now in order to have a desired amount in the future

Annual percentage rate

the cost of credit calculated as an annual percentage of the principal borrowed. the finance charge calculated as a percentage of the amount borrowed Congress passed the Truth in lending Act in 1986 this act required that at the actual annual percentage rate (APR) be given to the borrower. the apr is really a measure of the effective rate we have presented.. it protects the consumer form paying more than the stated rate without there knowledge. page 250

The credit crunch phenomenon

the economy went through periods of extreme credit shortages in the banking sector and in other financial markets. history has taught that the way not to deal with credit shortage is to impose artificial limits on interest rates in the form of restrictive usury laws or extreme governmental pressure. page 251

Cost of commercial banking financing

the effective interest rate on a loan is based on the loan amount, the dollar interest of paid the length of the loan and the method of repayment. it is easy to observe that $ 60 interest on a $1,000 loan for one year would carry a 6% interest rate, but what if the dame loan wer for 120 days? USE the Formula: effective rate =interest days in the year (360) __________x _________________________ principal days loan is outstanding $60 x 360 ____________=6% X3=18% 1,000x120 since we have use of the funds for only 120 days the effective rate is 18%. To highlight the impact of time if you borrowed $20 for 10 days and paid back $21 the effective interest rate would be 180% a violation of almost every usury law. $1/$20x360/10=5%x36=180%

credit policy administration

the extension of credit there are three primary policy variables to consider in conjunction with our profit objective. credit standards, terms of trade.. collection policy. Page 221

Passbook savings accounts

the lowest yielding investment may well be the passbook savings account at banks or savings and loans. rates on savings accounts are no longer prescribed by federal regulation they are still relatively unattractive form of investment in terms of yield. Page 220

Temporary

the movement from stage one to stage two of growth from a topical business is depicted a buildup in current assets. page 158 transient

Present value of an annuity

the process is reversed. the theory each individual payment is discounted back to the present and then all of the discounted payments are added up, yielding the present value of the annuity. page 280 an amount invested at a given interest rate that supports the payments of an annuity

Eurodollar certificate of deposit

the rate on this investment is usally higher than the rates on US treasury bills and bank certificates of deposit at large US banks. Eurodollars are US dollars hel on deposit by foreign banks and in turn lent by those banks to anyon seeking dollars. page 220

Market segmentation theory

the second theory states that treasury securities are divided into market segments by the various financial institutions investing in the market. page 189 theory that every borrower and lender has a preferred maturity and that the slope of the yield curve depends on the supply of and the demand for funds in the long-term market relative to the short-term market

Blanket inventory Liens

the simplest method is for the lender to have a general claim against the inventory of the borrower through blanket inventory liens. Specific items are not identified or tagged and there is not physical control. gives the lender a lien against all the borrower's inventories (blanket covers everything) page 258