Choosing short-term Debt Factors to consider the effective cost; the availability in the amount needed and for the period when financing is required; the influence of the use of a particular source on the cost and availability of other sources
Choosing Short-term Debt Factors to consider: ◼ the effective cost; ◼ the availability in the amount needed and for the period when financing is required; ◼ the influence of the use of a particular source on the cost and availability of other sources
Cash borrowings Market restricted to firms of high credit worthiness ■ Rarely secured. a Typically overnight(1lam money) or for days(24-hour loans)(rarely for more than 3 months)
Cash Borrowings ◼ Market restricted to firms of high credit worthiness. ◼ Rarely secured. ◼ Typically overnight (11am money) or for 7 days (24-hour loans) (rarely for more than 3 months)
Trade Credit/Accounts Payable Readily available and more or less free Effective management is important Cost of not taking discounts Stretching'' accounts payable ■ Text pp.554-7
Trade Credit/Accounts Payable ◼ Readily available and more or less free. ◼ Effective management is important. ◼ Cost of not taking discounts. ◼ “Stretching” accounts payable. ◼ Text pp. 554-7
Cost of foregoing discount CD 365 Cost 100%-CDN where CD= the cash discount n=the number of days payment can be delayed by not taking the discount
Cost of Foregoing Discount the discount can be delayed by not taking N the number of days payment where C D the cash discount N 365 100% -C D C D Cost = = =
Cost of foregoing discount a XYZ Ltd sells goods for $1 000 to ABC Ltd on the following terms: 2/10, n/30 a What is the cost to ABC ltd of foregoing the discount offered?
Cost of Foregoing Discount ◼ XYZ Ltd sells goods for $1 000 to ABC Ltd on the following terms: 2/10, n/30. ◼ What is the cost to ABC Ltd of foregoing the discount offered?