ACC 312 Study Guide - Midterm Guide: Debenture, Floating Charge, Financial Instrument

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30 Nov 2017

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Debentures and long-term loans are both debt, which are often taken to mean the same thing. However, loans may be either unsecured, or secured on some or all of the assets of the company. A debenture more specifically refers to the written acknowledgement of a debt by a company, usually given under its seal, and is secured on some or all of the assets of the company or its subsidiaries. A debenture agreement normally contains provisions as to payment of interest and the terms of repayment of principal. Security for a debenture may be by way of a floating charge, without atta(cid:272)h(cid:373)e(cid:374)t to spe(cid:272)ifi(cid:272) assets, o(cid:374) the (cid:449)hole of the (cid:271)usi(cid:374)ess(cid:859)s assets. If the company is not able to meet its obligations the floating charge will crystallise on specific assets like debtors or stocks. Security may alternatively, at the outset, take the form of a fixed charge on specific assets like land and buildings.

Related Questions

Gather info for Proctor &Gamble in 2016 for below. Please Help

Current

Prior

QUESTIONS

Year

Total cash received from the issuance of newdebt

Total cash paid to retire debt

Total amount due to all creditors

Current

NonCurrent

Short-term debt

The amount the company must pay to retire ALL ofits NOTES & DEBENTURES

Amount of long-term debt due each of the next fiveyears

Amount of interest costs expensed

Amount of interest costs capitalized

Compute the following ratios

current ratio

acid-test ratio

cash debt coverage

accts receivable turnover

inventory turnover

Comment on the company's liquidity

107

Fair value of all of the company's notes &debentures at the end of the current year?

Why might a difference exist between the book valueand fair value of debts (notes/debentures)?

Estimate the company's "cash" interest rate for thecurrent year

interest paid/ beg notes

Forecast the company's cash interest payment forthe upcoming year on long-term

0.0%

Estimate the total amount of cash the company willpay in principal and interest on long-term

Compute the following ratios

debt/total assets

times interest ernd

debt/equity

Comment on the company's solvency and financialflexibility.

Prepare a journal entry to record the purchase andretirement of the companyâs

long-term debt at the end of the current year at101% of its book value.

N/P

LOSS

CASH

109

Does the company own any derivative securities orengage in hedging transactions?

Describe

Does the company have any loss or gaincontingencies outstanding? Describe

106

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.

Assessing the Effects of Bond Credit RatingChanges

Ford Motor Co. reports the following information from the RiskFactors and the Management

Discussion and Analysis sections of its 2010 10-K report...

Credit Ratings: Our short-term and long-termdebt is rated by four credit rating agencies

designated as nationally recognized statistical ratingorganizations (âNRSROsâ) by the

Securities and Exchange Commission:

â¢î DominionîBondîRatingîServiceîLimitedî(âDBRSâ);

â¢î Fitch,îInc.î(âFitchâ);

â¢î MoodyâsîInvestorsîService,îInc.î(âMoodyâsâ);îand

â¢îîStandardî&îPoorâsîRatingîServices,îaîdivisionîofîTheîMcGraw-HillîCompaniesî(âS&Pâ).

Lower credit ratings generally result in higher borrowing costsand reduced access to capital

markets. In 2005 and 2006, the credit ratings assigned to FordCredit were lowered to below

investment grade, which increased its unsecured borrowing costsand restricted its access to the

unsecured debt markets. In response, Ford Credit increased itsuse of securitization transactions

(including other structured ï¬nancings) and other sources offunding. In 2010, although Ford Credit

experienced several credit rating upgrades and its creditspreads narrowed considerably, its credit

ratings are still below investment grade. Ford Creditâs highercredit ratings have provided it more

economical access to the unsecured debt markets, but it is stillutilizing asset-backed securitization

transactions for a substantial amount of its funding . . . Overtime, and particularly in the event of

any credit rating downgrades, market volatility, marketdisruption, or other factors, Ford Credit may

reduce the amount of receivables it purchases or originatesbecause of funding constraints . . .

A signiï¬cant reduction in the amount of receivables Ford Creditpurchases or originates would

signiï¬cantly reduce its ongoing proï¬ts and could adverselyaffect its ability to support the sale of

Ford vehicles. The following ratings actions have been taken bythese NRSROs since the ï¬ling of

our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2010:

Ford

- On January 28, 2011, Moody's affirmed Ford Motor Company'sratings and changed the rating outlook to positive from stable.

- On Januaary 28, 2011, Fitch upgraded Ford's corporate ratingto BB from BB-, the senior secured ration to BBB- from BB+ and thesenior unsecured

ration from BB- from B. Fitch also changed the outlook topositive from stable.

- On February 1, 2011, S&P upgraded Ford's corporate ratingto BB- from B+, the senio secured debt rating

to BB+ from BB and the senior unsecured debt rating to B+ fromB. The outlook remains positive.

Ford Credit

- On January 28, 2011, Moody's affirmed Ford Credit's ratingsand changed the rating outlook to positive from stable.

- On January 28, 2011, Fitch upgraded Ford Credit's corporaterating to BB from BB-. Fitch also affirmed the senior unsecuredrating at BB- and the short-term rating at B. Fitch

changed the outlook to positive from stable.

- On February 1, 2011, S&P upgraded Ford Credit's corporaterating to BB- from B+ and its senior unsecured debt rating to BB-from B+. The outlook

remains positive.

Questions:

a. What ï¬nancial ratios do credit ratingcompanies such as the four NRSROs listed above, use to evaluate therelative riskiness of borrowers?

b. Why might an increase in credit ratingsresult in lower interest costs and increase Fordâs access to creditmarkets?

c. What type of actions can Ford take toimprove its credit ratings?

ACC 312 Study Guide - Midterm Guide: Debenture, Floating Charge, Financial Instrument

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