Short & Medium-Term Sources of Finance

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What is the net daily purchases of the firm?

P82,192

P246,575

P3,000,000

P8,219.18 (correct)

What is the average payables if the firm takes discounts?

P82,192 (correct)

P246,575

P8,219.18

P164,383

What is the primary characteristic that distinguishes short-term financing from medium-term financing?

The type of collateral required

The repayment period, with short-term financing repayable within 1 year (correct)

The interest rate charged

The purpose of the financing

What is the nominal cost of trade credit of the firm?

18.43% Signup and view all the answers

What is the major spontaneous source of short-term financing?

Trade creditors/Accounts Payables Signup and view all the answers

What is the formula to calculate the nominal cost of trade credit?

rNOM = (Discount %) / (Days taken - Disc. period) Signup and view all the answers

What is the benefit of using trade credit with respect to working capital?

It helps to keep working capital down Signup and view all the answers

What is the effective cost of trade credit of the firm?

20.13% Signup and view all the answers

What is the cost associated with failing to take discounts on trade credit?

Opportunity costs Signup and view all the answers

What is the main factor that influences the trade credit period?

All of the above Signup and view all the answers

What is the purpose of accruals in short-term finance?

To provide spontaneous sources of finance Signup and view all the answers

What is the typical duration of trade credit extended to customers?

1 to 3 months Signup and view all the answers

What is the benefit of trade credit with respect to loan agreements?

It does not require a formal loan agreement Signup and view all the answers

What happens if a firm stretches the credit period without compromising its credit rating?

The firm will have more liquidity Signup and view all the answers

What is the purpose of a discount rate in trade credit?

To incentivize customers to pay earlier Signup and view all the answers

What is the implication of not taking discounts on trade credit?

It results in opportunity costs Signup and view all the answers

What type of costs do accrued items, such as wages and taxes, vary directly with?

Level of sales Signup and view all the answers

What is a characteristic of accrued items such as wage accruals?

They are easily manipulated by the firm Signup and view all the answers

What is a major source of short-term loans to firms?

Bank loans Signup and view all the answers

What is the purpose of a self-liquidating loan?

To carry the firm through seasonal or temporary peaks in financing needs Signup and view all the answers

What is the interest rate for a 1-year simple interest loan of P100,000 at an 8% nominal rate?

8.0% Signup and view all the answers

What is the approximate cost of an add-on interest loan of P100,000 at an 8% nominal rate?

16.0% Signup and view all the answers

What is the monthly payment for an add-on interest loan of P100,000 at an 8% nominal rate?

P9,000 Signup and view all the answers

What is the average loan outstanding for an add-on interest loan of P100,000 at an 8% nominal rate?

P50,000 Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

How is the interest rate on a line of credit typically stated?

As a floating rate tied to the prime rate plus a premium Signup and view all the answers

What may a bank require from a firm before approving a line of credit?

The firm's financial statement forecasts Signup and view all the answers

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 Signup and view all the answers

What is the typical duration of a single payment note?

30 days to 9 months or slightly more Signup and view all the answers

What is the effective annual rate (EAR) of the given add-on interest calculator output?

15.45% Signup and view all the answers

What is the primary purpose of a bank overdraft facility?

To bridge the gap between cash income and cash expenses Signup and view all the answers

How is the interest charged on an overdraft facility?

On the utilized amount only Signup and view all the answers

What is a characteristic of a short-term loan?

It has a fixed period of time to repay the loan Signup and view all the answers

What is a disadvantage of a bank overdraft facility?

It is repayable on demand Signup and view all the answers

What is an advantage of a short-term loan over a bank overdraft?

It is more secure for the borrower Signup and view all the answers

What is the range of the overdraft rate of interest above the lender bank's base lending rate?

2% - 5% Signup and view all the answers

What is a characteristic of the repayment of a short-term loan?

It can be either in instalments or a lump sum Signup and view all the answers