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Management and Organizational Studies
Management and Organizational Studies 2275A/B
Henry Meredith

Last Lecture 12/4/2012 10:58:00 AM Banking, debtor and creditor law 55 questions, 2 hours long, questions evenly distributed per lecture corporation’s advantage over other types: raise capital in two ways (equity financing) creditor and debtor relationship is a contractual relationship. Shareholder and corporation: ownership/property (Rights and remedies) relationship Valid loan agreement: must contain all the elements of contract typical business borrower and lender relationship? (example) fixed term loan: loan with defined term. Repaid on blended periodic installment payment of interest and principal. Double declining balance. Collateral as security; long term assets (plant) why aren’t they worried about the interest rate fluctuating? fixed or floating interest rate—fixed because it’s a fixed term loan, meaning they buy the money at today’s rate at prevailing PRESENT interest rate therefore gain is already calculated regardless of the fluctuating interest rate in the future. Risk premium (fixed interest rate): prime rate plus x% (depends on the level of the “risk” of the borrower) If, however, the “risk” of the borrower increases, bank may risk losing money. Cash flow gap, working capital, line of credit: no fixed principal How do you pay interest on line of credit?: no principal repayment, monthly repayment on interest for previous month. Floating rate: bank is exposed to risk. Risk premium remains the same. Collateral for working capital? Pretty much whatever you have. Specifically… current assets: accounts receivable, inventory, any CASH, etc. Weak covenance on operating line of credit Confidence in management debt service: will you have enough money to repay the loan? Loan evaluation: valuation of collateral. Will the value of the collateral pay off the loan? Both questions must be yes in order to receive the loan. Banks get paid regardless of you succeed/fail. Banks cannot afford to lose any money. (bank’s business model) Risk reduction - credit policies - restructure - guarantees (contract between guarantor and cred
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