ADM 3350 Lecture Notes - Lecture 2: Credit Score, Price Discrimination, Net Present Value

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cerisetortoise516

21 Nov 2017

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Case how can yellow house events get more money upfront to pay for its event: offer a prepayment discount (cash discount, work with a factoring company, create a preferred suppliers list. Introduction: a fi(cid:396)(cid:373)"s (cid:272)(cid:396)edit poli(cid:272)(cid:455) is (cid:272)o(cid:373)posed of: Terms of the sale: payment period, early pay discounts. Collection policy: this chapter discusses each of the components of credit policy that make up the decision to grant credit. Terms of the sale: the terms of sale are composed of. The cash flows of granting credit (figure 29. 2) Risk stands in between the time the credit sale is made and the time the customer mails the (cid:272)he(cid:395)ue . Credit period: credit periods vary across industries. If a discount is offered, then there are two periods: net credit period and cash discount period, net credit period: length of time the customer has to pay, cash discount period: time during which the discount is available.

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QUESTION 1

Flexibility of the source of financing. ____ tends to require fewer specific asset restrictions, while _____ tends to require fewer enterprise restrictions.

	a.	Leases; loans
	b.	Leases, leases
	c.	Loans; loans
	d.	Loans, leases

QUESTION 2

_____ is not really buying on credit, whereas _____ is generally free financing for a specified period of time.

	a.	Cash on delivery, cash in advance.
	b.	Cash in advance; net 30
	c.	Net 30, cash in advance
	d.	Net 30; 1/15 net 40

QUESTION 3

_____ is often used by manufacturers to significantly lower their production cost. It gives them the ability to produce in a level production mode year round, rather than running two or three shifts at the peak of their demand cycle.

	a.	Consignment
	b.	Net cash, bill to bill
	c.	Seasonal dating
	d.	Cash in advance

QUESTION 4

A firm is offered credit terms of 1.5/10, net 40. What would be the cost to this firm of using its vendor as its banker?

	a.	18.53%
	b.	18.25%
	c.	13.90%
	d.	17.63%

QUESTION 5

A company estimates its cost of vendor financing (using its vendor as its banker) is 12.2%. It also estimates its effective cost of bank financing to be 9.1%. Which statement best describes this situation?

	a.	Can't say for sure what the better funding source would be.
	b.	The vendor offers less expensive financing and should be used instead of the bank for that reason.
	c.	The company should use its vendor as its financing source, not its bank.
	d.	The company should borrow from its bank and take advantage of the trade discount being offered.

QUESTION 6

A company is offered purchase terms of 2/10, net 40. If it can borrow from its bank for 8%, how long would it need to wait to pay its supplier to bring the cost of vendor financing down to 8%, making it a matter of indifference which financing source was used. I.e., instead of paying in 40 days, when would it pay to reduce the cost of vendor financing to 8%, assuming the vendor would permit it?

	a.	83 days
	b.	93 days
	c.	103 days
	d.	113 days

QUESTION 7

What is the effective cost of bank financing if the loan amount is $100,000, interest is discounted (advance), a 1% commitment fee is paid up front, and a 9% compensating balance is required? The stated interest rate is 8%.

	a.	8.00%
	b.	8.98%
	c.	10.98%
	d.	9.98%

QUESTION 8

Floor planning is best described as:

	a.	Consignment with interest
	b.	Seasonal dating
	c.	Consignment
	d.	Receivables financing

QUESTION 9

Coverage ratios as covenants are calculated using values from the _________. Current ratios as covenants are calculated using values from the ______.

	a.	Income statement and balance sheet; balance sheet
	b.	Income statement; balance sheet
	c.	Balance sheet; balance sheet
	d.	Income statement; income statement and balance sheet

QUESTION 10

_____________ as a source of short-term financing, is described as spontaneous financing.

	a.	Long-term debt
	b.	Commercial paper
	c.	Bank loans
	d.	Trade credit

Small business management class.

Please answer the two questions from the article belowplease.

Q1)Which one of the techniques to increase cash inflows is bestillustrated in the article? Explain how you know. ?

Q2)Which one of the techniques to decrease cash outflows is bestillustrated in the article? Explain how you know. ?

The article:

The financial crisis on Wall Street is quickly spiraling down tosmall businesses, making it extremely difficult for them to securefrom large banks the credit they need to start and maintain theiroperations.

Some businesses that currently have good relationships withbanks are getting more scrutiny and higher interest rates -- suchas 15% or more. Riskier borrowers are being denied creditaltogether.

Aside from falling back on friends or family -- or charging upyet another credit card -- here's a look at five alternatives forgetting extra cash to run a business in this economy.

-- Peer-to-Peer Lending Sites

Several Web sites now facilitate loans between individuals whodon't know each other. Typically, the prospective borrowers createprofiles that include how much they need to borrow, what the moneywill be used for and some credit history.

Other individuals can browse the loan requests and make offersthat include payment terms and interest rates. Prospective lendersalso get a risk assessment of the borrower generated by the Website based on the borrower's credit history.

Some "peer-to-peer" lending sites include LendingClub.com,Prosper.com, RaiseCapital.com and Zopa.com.

On Prosper.com, for instance, 25% of borrowers are individualsrunning or looking to start businesses, says Chief Executive ChrisLarsen. The site facilitates loans between individuals from $1,000to $25,000, and interest rates on those loans right now range from6% for those with the strongest credit ratings to about 30%.

Prosper, which has 800,000 registered users, is seeing moreentrepreneurs with good credit scores signing up. "We're certainlyseeing a steady increase of the quality of borrower coming to oursite," Mr. Larsen says. About 55% of the loans being funded are forborrowers with credit scores above 720, he adds, while only about5% are for those categorized as "subprime" borrowers.

-- Community Banks, Credit Unions

While big banks are being battered by all the financial turmoilon Wall Street, many local banks and credit unions are far morestable.

In fact, community banks continue to expand, although some havesuffered losses on securities issued by troubled mortgage giantsFannie Mae and Freddie Mac, says Camden Fine, chief executive ofthe Independent Community Bankers of America, an industryassociation in Washington.

Still, he says, even the community banks are more hesitant tolend to companies that lack rock-solid balance sheets.

-- Factoring, Asset-Based Loans

Though certainly not a cheap route to capital, some banks andnon- bank financing companies offer financing that is backed by abusiness's assets or accounts receivable.

So-called factoring, where a lender might, say, outright give aborrower 80 cents on the dollar for the company's accountsreceivable, can be a good option for businesses like manufacturersthat are owed a lot of money by customers and that have no betterlending option right now, says Raphael Amit, an entrepreneurshipprofessor at the University of Pennsylvania's Wharton School.

Interest rates on such financing can sometimes run 15% orhigher, so it's best to only resort to this approach when there'sno lower-cost option.

So-called asset-based loans -- loans in which assets such asinventory, equipment or real estate are used as collateral -- canbe good options for companies with lots of assets. But again, ratestend to run much higher than on traditional bank loans. The loanamounts are often capped at a percentage of the assessed value ofthe assets, such as 65%.

Also, even loans backed by assets can be difficult to get forcompanies with less-than-stellar credit ratings. Mark Sunshine,president of First Capital, a West Palm Beach, Fla., financecompany, says he's seeing more demand for loans based on accountsreceivable or assets, but isn't necessarily doing much morebusiness. "There's a reason local banks won't lend them money," hesays of riskier small companies. He says he's sticking to companieswith lots of assets to use as collateral.

-- Negotiating With Customers or Suppliers

Another smart strategy for helping cash flow -- perhaps even ifyou do have access to loans -- is striking better payment termswith customers and suppliers, Prof. Amit says. Especially whenbusiness relationships are strong and long-lasting, many companiesare willing to help each other out in tough economies.

A business that usually gives customers 30 to 60 days to pay thebills, for instance, might require customers to pay upon receipt ofgoods. A supplier, on the other hand, might be willing to extendlengthier payment terms to a business customer if it feels thecustomer is trustworthy and vital to its own business. Somesuppliers also will lend money to their longstanding, most valuedcustomers.

-- Changing Behaviors

Hard times call for small businesses to be nimble andentrepreneurial. Many businesses are using the tough economy toscrutinize their business practices and find creative ways tocreate better cash flow.

Some turn to leasing instead of buying equipment they need.

Others are identifying areas of the business that will tend tobe more lucrative in today's economy and shifting their resourcesin those directions.

Question 8

Which of the following is NOT one of the steps taken in the financial planning process?
Answer Forecast the funds that will be generated internally. If internal funds are insufficient to cover the required new investment, then identify sources from which the required external capital can be raised.
Monitor operations after implementing the plan to spot any deviations and then take corrective actions.
Determine the amount of capital that will be needed to support the plan.
Develop a set of forecasted financial statements under alternative versions of the operating plan in order to analyze the effects of different operating procedures on projected profits and financial ratios.
Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.
.2 points
Question 9

Which of the following statements is CORRECT?
Answer Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
If a firm has a positive free cash flow, then it must have either a zero or a negative AFN.
.2 points
Question 10

Spontaneous funds are generally defined as follows:
Answer Assets required per dollar of sales.
A forecasting approach in which the forecasted percentage of sales for each item is held constant.
Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.
Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include immediate increases in accounts payable, accrued wages, and accrued taxes.
The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm

ADM 3350 Lecture Notes - Lecture 2: Credit Score, Price Discrimination, Net Present Value

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