38 Questions
What is the net daily purchases of the firm?
P8,219.18
What is the average payables if the firm takes discounts?
P82,192
What is the primary characteristic that distinguishes short-term financing from medium-term financing?
The repayment period, with short-term financing repayable within 1 year
What is the nominal cost of trade credit of the firm?
18.43%
What is the major spontaneous source of short-term financing?
Trade creditors/Accounts Payables
What is the formula to calculate the nominal cost of trade credit?
rNOM = (Discount %) / (Days taken - Disc. period)
What is the benefit of using trade credit with respect to working capital?
It helps to keep working capital down
What is the effective cost of trade credit of the firm?
20.13%
What is the cost associated with failing to take discounts on trade credit?
Opportunity costs
What is the main factor that influences the trade credit period?
All of the above
What is the purpose of accruals in short-term finance?
To provide spontaneous sources of finance
What is the typical duration of trade credit extended to customers?
1 to 3 months
What is the benefit of trade credit with respect to loan agreements?
It does not require a formal loan agreement
What happens if a firm stretches the credit period without compromising its credit rating?
The firm will have more liquidity
What is the purpose of a discount rate in trade credit?
To incentivize customers to pay earlier
What is the implication of not taking discounts on trade credit?
It results in opportunity costs
What type of costs do accrued items, such as wages and taxes, vary directly with?
Level of sales
What is a characteristic of accrued items such as wage accruals?
They are easily manipulated by the firm
What is a major source of short-term loans to firms?
Bank loans
What is the purpose of a self-liquidating loan?
To carry the firm through seasonal or temporary peaks in financing needs
What is the interest rate for a 1-year simple interest loan of P100,000 at an 8% nominal rate?
8.0%
What is the approximate cost of an add-on interest loan of P100,000 at an 8% nominal rate?
16.0%
What is the monthly payment for an add-on interest loan of P100,000 at an 8% nominal rate?
P9,000
What is the average loan outstanding for an add-on interest loan of P100,000 at an 8% nominal rate?
P50,000
What is the key characteristic of a single payment note?
It is a one-time loan made to a borrower who needs funds for a specific purpose for a short period
What is the purpose of a line of credit?
To make unsecured short-term borrowing available to a firm over a given period of time
How is the interest rate on a line of credit typically stated?
As a floating rate tied to the prime rate plus a premium
What may a bank require from a firm before approving a line of credit?
The firm's financial statement forecasts
What is the benefit of a line of credit in terms of creditworthiness?
It eliminates the need to examine the creditworthiness of the firm each time it borrows
What is the typical duration of a single payment note?
30 days to 9 months or slightly more
What is the effective annual rate (EAR) of the given add-on interest calculator output?
15.45%
What is the primary purpose of a bank overdraft facility?
To bridge the gap between cash income and cash expenses
How is the interest charged on an overdraft facility?
On the utilized amount only
What is a characteristic of a short-term loan?
It has a fixed period of time to repay the loan
What is a disadvantage of a bank overdraft facility?
It is repayable on demand
What is an advantage of a short-term loan over a bank overdraft?
It is more secure for the borrower
What is the range of the overdraft rate of interest above the lender bank's base lending rate?
2% - 5%
What is a characteristic of the repayment of a short-term loan?
It can be either in instalments or a lump sum
Learn about short-term and medium-term financing, including borrowings, trade creditors, and accounts payable. Understand the importance of establishing an optimal combination of financing sources.
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