Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

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200 QUESTIONS AND PROBLEMS

days, in addition to increasing sales due to the higher dis-

count. Sales are expected to increase from the present

$500,000 to $800,000. About 60% of Retton’s customers

take the discount now, and it is estimated that the per-

centage will increase to 75%. The ﬁrm plans to maintain

its present contribution margin of 30%. Processing costs

and bad debt losses are not expected to change. Retton

can earn 12% on its short-term investments.

a. What is the current cost of trade credit for Retton’s cus-

tomers, and what will it be if Retton makes the proposed

change?

b. What is the cost to Retton for changing the discount?

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Management of Receivables and Inventory 201

c. What is the change in the carrying cost of accounts

receivable for Retton?

d. Should Retton make the change?

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CHAPTER

203

Management of Short-Term

Financing

FILL IN THE BLANKS

Refer to Chapter 21, pages 679–714 in Financial Manage-

ment and Analysis.

1. A corporation invests in short-term assets, such as

______________, accounts ______________, inventory, and

marketable ______________. Short-term assets are also

referred to as ______________ capital, because they are put to

work to generate sales, which eventually result in cash ﬂow

that ultimately generates ______________. ______________

capital comprises ______________ working capital, the

investment necessary to satisfy the ______________ demands

of ______________, and ______________ working capital,

the ______________ between actual working capital and per-

manent working capital.

2. The ______________ cost of borrowing is the cost of

______________, considering both ______________ and

______________ costs. This effective cost is the cost of

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204 QUESTIONS AND PROBLEMS

______________ for a given period, the duration of time

over which interest is paid and at the end of which

______________ is calculated.

3. ______________ credit is granted by a supplier to a customer

purchasing ______________ or ______________.

______________ credit arises as the customer acquires goods

or services and promises to pay in the ______________. From

the ______________ point of view, trade credit is a way of

making more ______________. From the ______________

point of view, trade credit is an easy way to finance the

______________ of goods. For the ______________, trade

credit creates accounts ______________; for the

______________, trade credit creates accounts ______________.

4. Managing accounts ______________ involves negotiating

the terms of ______________, as well as deciding when to

pay amounts due. Remember that accounts ______________

are the “flip side” of accounts ______________—accounts

payable are someone else’s accounts receivable. Suppliers

are trying to ______________ costs, in terms of funds tied

up in accounts receivables and bad debts. Yet, at the same

time, they are extending ______________ to generate more

______________.

5. Firms try to set policies so terms of credit are

______________ within industries. However, if a firm is an

important ______________ of a particular supplier,

______________ terms of credit may be negotiated. In cal-

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Management of Short-Term Financing 205

culating the ______________ of trade credit, managers

know that paying within the ______________ period uses

free credit—meaning that payment can be ______________

and then paid the same as cash on the date of purchase.

Also, paying ______________ the discount period

______________ the cost of credit.

6. ______________ financing is backed by some specific

______________ or assets of the borrower. A borrower’s

______________ used in this way are referred to as

______________. The ______________ acts as a backup

source of ______________ for the lender if the borrower fails

to abide by the terms of the loan. The collateral for short-

term financing arrangements are usually ______________

assets—______________ securities, accounts ______________,

or ______________.

7. Accounts ______________ can be used as collateral for a(n)

______________ loan. There are three types of financing

arrangements that use accounts ______________ as security:

______________, ______________, and ______________.

Securitizing assets, also referred to as asset ______________,

is an important financing arrangement for raising

______________ to ______________ term funds.

8. In an assignment of ______________, the lender makes a

loan accepting the borrower’s accounts ______________

as the ______________. The borrower receives immediate

______________ in exchange for a(n) ______________

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206 QUESTIONS AND PROBLEMS

note to the lender. The borrower’s customers are generally

instructed to send their payments to the lender, who uses

these payments to reduce the ______________ of the loan.

9. Instead of simply using accounts ______________ as

______________, the borrower can ______________ them

outright to another party—called a(n) ______________—

typically a bank or a commercial finance company. Selling

the ______________—called factoring—may be done with

or without recourse. The factor performs all the accounts

receivable functions: evaluating customers’ ______________,

approving ______________, and ______________ on

accounts receivable.

10.A(n) ______________ agreement, also referred to as a(n)

______________, is the sale of a security with a commit-

ment by the seller to buy the same security back from the

purchaser at a specified price at a designated future date.

The seller repurchases the security at the repurchase

______________, on the repurchase ______________. A

repurchase agreement is a(n) ______________ loan, where

the collateral is the ______________. The interest rate is

the ______________ rate. When the term of the loan is one

day, it is a(n) ______________ repo and a loan for more

than one day is called a(n) ______________ repo.

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Management of Short-Term Financing 207

SHORT ANSWER QUESTIONS

Refer to Chapter 21, pages 679–714 in Financial Manage-

ment and Analysis.

1. What are the costs of borrowing for all manner of loans?

2. What is the difference between secured and unsecured

financing?

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208 QUESTIONS AND PROBLEMS

3. Why is it that as the credit period lengthens, the cost of

trade credit declines?

4. When managing accounts payable, what are the conse-

quences of paying late?

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Management of Short-Term Financing 209

5. Why might high and low turnover be good?

6. What are the types of financing arrangements and some of

their characteristics?

PROBLEMS

Refer to Chapter 21, pages 679–714 in Financial Manage-

ment and Analysis.

1. The CZ company is trying to decide among four different

ﬁnancing alternatives to ﬁnance $100,000:

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