Intro to Ag Business Chapter 11

What is the formula for APR?

(2 x P x F/ B x (T + 1)) x 100

What is the formula for simple interest?

(Amount of interest paid/ Amount of Available Capital) x 100

Simple Rate of Return=

(Average Annual Return/ Average Investment)

Present Value of the Investment=

(Future Value of the Investment) x (1 +I)^-n

Payback Period=

(Investment)/ (Average Annual Net Cash Flow)

Future Value of the Investment=

(Present Value of the Investment) x (1 +I)^n

Advantages of leasing:

1. Avoid using its cash resources for purchasing assets 2. Will not have to resort to borrowing or selling equity 3. A deductible expense

What is the volume-cost analysis procedure?

1. Classify fixed and variable costs 2. Summarize the fixed and variable costs 3. Calculate the contribution to overhead 4. Calculate the breakeven point

Disadvantages of leasing:

1. Costs more 2. Commits the business to certain payments 3. Leased property may increase in value

What are the steps of capital budgeting?

1. Identification if investment alternatives 2. Selection of an appropriate capital budgeting evaluation method 3. Collection of relevant data 4. Analysis of the data 5. Interpretation of the results

What are the steps of the decision-making process?

1. Problem identification 2. Summary of facts 3. Identifying alternatives 4. Analysis 5. Action 6. Evaluation

What are the four types of capital?

1. Short-term loans: 1 year or less 2. Intermediate-term loans: 1 to 5 years 3. Long-term loans: more than 5 years 5. Equity capital: no due date

There are three sources from which the manager may raise the funds needed to operate an agribusiness:

1. investment by owners 2. borrowing 3. funds generated by profits and retained in the business

When available funds can be calculated from all sources of cash flow, generally two factors are considered the primary inputs for debt servicing:

1. net operating income for the year 2. depreciation

As a rule, many agribusinesses find it advisable to keep on hand enough cash to equal ______ to ______ percent of the amount of their current liabilities.

20-25

When lending institutions look a t debt servicing figures, many use the rule that no more than ____ to ____ percent of the total should actually be counted on as available for debt servicing because of the possibility of missing budgeted figures or emergency situations.

50-60

Loans in which the bank uses a business's accounts receivable as collateral. This may be done under a notification or non-notification basis. Notification means that the bank informs the debtors that it wishes to collect the money that is owed. Under non-notification, the agribusiness collects the receivables and then forwards the payments to the bank.

Accounts receivable loans

Additional Sales to Cover New Fixed Costs=

Additional Fixed Cost/ CTO

What is the discounted loan formula?

Amount of Loan- Amount of Interest Paid= Amount of Available Capital

The true annual rate of interest which is charged on a loan

Annual percentage rate of interest (APR)

A stream of incomes and/ or costs that are equal amounts for each of the number of periods evaluated

Annuities

What is the formula for After-tax Cost of Borrowing?

Before-tax cost x (1.0- Marginal Tax Rate)

A specific forecast of financial performance that is used as a tool for not only controlling the business, but also for determining future borrowing needs and repayment schedules

Budget

The procedure for evaluating the effects of an agribusiness manager's investment choices on the profitability, risk, and liquidity of a business

Capital budgeting

Refers to the addition of durable assets to an agribusiness which usually requires relatively large financial outlays and will last over a long period of time

Capital investment

A long-term contractual arrangement in which the lessee acquires control of an asset in return for rental payments to the lessor. Usually runs for several years and cannot be cancelled

Capital lease

A projection of the firm's cash inflows and outflows for a future time period. It allows the manager to estimate the amount of cash needed to take advantage of cash discounts, to finance seasonal demands, to expand, and to make plans for debt servicing

Cash flow statement

An investor-owned institution that accepts deposits and then allows checks to be written against those deposits as a means of making payments; the primary source of borrowed funds for most agribusinesses

Commercial bank

Those finance companies or special lenders that focus on business and commercial loans

Commercial finance companies

A specified amount of money that must be retained in a bank account while a loan is outstanding

Compensating balance

A method of calculating interest earned periodically when that interest is added to the principal and becomes part of the principal base on which future interest is earned

Compounding

Gross margin less variable costs

Contribution margin

The portion of each unit (dollar) of sales that remains after variable costs are covered and that can be applied toward covering fixed costs

Contribution to overhead

The portion of each unit (dollar) of sales that remains after variable costs and all fixed costs are covered; CTO at sales volumes greater than the firm's breakeven point

Contribution to profit

The process of choosing between different alternatives for the purpose of achieving desired goals

Decision-making

The interest rate used in capital budgeting which is the firm's required rate of return on its equity capital. Three components: risk free interest rate, risk premium, inflation premium

Discount rate

The amount of interest to be paid is deducted from the amount the lender makes available to the borrower

Discounted

A method of converting a future value to a present value by adjusting the future value by its discount rate

Discounting

Does not have to be repaid. Becomes a permanent part of the capital of a business; Funds provided by the owners of a business either directly or by reinvesting profits back into the business; the risk capital of a firm

Equity capital

Represents funds that are obtained by the firm through retaining the profits it has made, through the investment of more money by the owners, or through taking into the business additional people who are willing to risk their funds

Equity capital

Breakeven in Units=

Fixed Costs/ Selling Price per unit-variable costs per unit

Costs in which the total amount does not fluctuate with the volume of a business

Fixed costs

Breakeven in Sales Dollars=

Fixed costs/ 1.0-Variable costs as a proportion of net sales

Results in the highest APR since the full amount of the loan is available for only one month. At the end of the first month, part of the principal is repaid to the lender

Installment loan

Reflects investors' time preferences for money and serves as the exchange price between money received today versus money received at some point in the future

Interest rate

Typically used to provide capital for one to five years. Such a loan is always amortized-that is, the amount of the loan is reduced by equal, periodic payments that include both interest and principal.

Intermediate-term loans

The discount rate that equates the net present value of the projected net cash flows to zero

Internal rate of return

A contract that conveys control over the use rights in real property from the lessor the lessee without transferring title

Land lease

A contract by which the control over the right to use an asset is transferred from the lessor to the lessee for a specified time in return for a rental payment

Lease

The concept of financing through long-term debt instead of equity capital

Leverage

A commitment by the lender to make available a certain sum of money to the firm, usually for a one-year period and at a specified rate of interest, at whatever time the firm needs the loan. Usually the loan must be repaid during the operating year of the firm.

Line of credit

Two or more years in implementation and is usually reported in a semi-annual or annual basis

Long-range budget

Have a duration of more than 5 years. Most often used for real estate. Nearly always amortized over the loan period and secured by a mortgage or claim on a specific fixed asset

Long-term loans

The identification of investment opportunities falls into one of the four categories:

Maintenance and replacement of depreciable capital items, Cost-reducing investments, Income-increasing investments, A combination of the preceding catgeories

Include all the cash inflows and all the cash outflows for operating expenses and any other capital expenditures

Net cash flows

The current, net value of an investment taking the time value of money into consideration when evaluating costs and returns

Net present value

Usually a short-term rental arrangement in which the rental charge is calculated on a time-of-use basis. The lessor owns the assets and performs almost all the functions of ownership, including maintenance. The lessee pays the direct costs, such as fuel and labor.

Operating lease

The length of time it will take an investment to generate sufficient additional cash flows to pay for it

Payback period

Service charges based on the face value of the loan; These charges for risk and loan servicing are made in advance, and the amounts charged are usually deducted from the total amount borrowed at the time the loan is made

Points

The stock to which a corporation shows preference. In the event of liquidation of the corporation, the owners of preferred stock would be repaid before holders of common stock

Preferred stock

Additional Sales to Reach Profit Goal=

Profit Goal/ CTP

A promise by the borrower to pay the lender a particular amount of money and a particular amount of interest after a specified period of time

Promissory note

Costs that are partly fixed and partly variable such as electricity

Semi-variable costs

Generally one that will be implemented within a year and it usually requires shorter reporting periods

Short-term budget

Loans for one year or less and used whenever the requirement for additional funds is temporary; self-liquidating; often require collateral

Short-term loans

Give the borrower the use of the greatest amount of borrowed funds for the longest period of time

Simple interest loan

The type of interest charge used on many personal loans; involves a rate of interest applied to an amount available for the entire period of the loan; the amount of interest paid dividend by the amount of available capital

Simple interest rate

Refers to the profit generate by the investment as a percentage of the investment

Simple rate of return

The residual value the investment is expected to have at the end of the planning horizon. For depreciable assets, this is called salvage value.

Terminal value

Result in a slight decrease in the amount of borrowed funds while paying interest on the total amount for the entire time of the loan, so the borrower pays a higher annual percentage rate

The discounted and compensating balance loans

Credit advanced by suppliers and vendors to a firm in the process of providing goods and services to the firm

Trade credit

Costs in which the total amount changes directly with the volume of sales

Variable costs

Focuses on providing equity capital to new and high potential businesses

Venture capitalist

Shows the level of business necessary to break even and/ or earn a profit under various cost and price assumptions

Volume-cost analysis

Represent a means if using inventory as security for a loan. The bank is aware when the product is sold and can immediately collect the payment from the agribusiness

Warehouse receipts

Although money itself is not capital, it represents the amount of....

capital a firm could control.

In ______________ _____________, the cooperative patrons, who are also its borrowers, own these special banks. The bank makes short, intermediate, and long-term loans to its members. To receive a loan, a cooperative must purchase an amount of membership stock that is equivalent to the amount of money being borrowed. This stock is repurchased whenever the debt is repaid and the firm has funds available for that purpose.

cooperative borrowing

Short-term loans should not be used to acquire ___________ assets.

fixed

some prediction of the future

forecast

The ultimate reason for increasing the financial resources of an agribusiness is to...

increase its revenues, and ultimately its profits, by generating additional business. Extra funds are used for general purposes, to increase liquidity or the cash position, or for expansion and growth.

In most medium-to-large businesses, the major source of funds (over 50 percent) is the...

owner's equity in the firm. The larger the company, the more it depends in owner's equity as a source of funds.

Projected financial statements for some specified time period in the future

pro forma financial statements

Short-term borrowing is only appropriate for...

temporary uses