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    FM 1 Short Term Financing

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    Crizhae Ocon
    This document discusses short-term financing options from various banks with different interest rates and terms. It also presents four funding alternatives - factoring accounts receivable, borrowing from banks, issuing commercial paper, or borrowing from banks - to increase a company's working capital and calculates the costs of each option. Additionally, it examines the financial leverage of a baseball bat company considering debt financing, preferred stock, or common stock to fund an expansion, calculating earnings per share and break-even points for each alternative.

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    FM 1 Short Term Financing

    Uploaded by

    Crizhae Ocon
    132 views2 pages
    This document discusses short-term financing options from various banks with different interest rates and terms. It also presents four funding alternatives - factoring accounts receivable, borrowing from banks, issuing commercial paper, or borrowing from banks - to increase a company's working capital and calculates the costs of each option. Additionally, it examines the financial leverage of a baseball bat company considering debt financing, preferred stock, or common stock to fund an expansion, calculating earnings per share and break-even points for each alternative.

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    FM 1 SHORT TERM FINANCING

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    This document discusses short-term financing options from various banks with different interest rates and terms. It also presents four funding alternatives - factoring accounts receivable, borrowing from banks, issuing commercial paper, or borrowing from banks - to increase a company's working capital and calculates the costs of each option. Additionally, it examines the financial leverage of a baseball bat company considering debt financing, preferred stock, or common stock to fund an expansion, calculating earnings per share and break-even points for each alternative.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    132 views2 pages

    FM 1 Short Term Financing

    Uploaded by

    Crizhae Ocon
    This document discusses short-term financing options from various banks with different interest rates and terms. It also presents four funding alternatives - factoring accounts receivable, borrowing from banks, issuing commercial paper, or borrowing from banks - to increase a company's working capital and calculates the costs of each option. Additionally, it examines the financial leverage of a baseball bat company considering debt financing, preferred stock, or common stock to fund an expansion, calculating earnings per share and break-even points for each alternative.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    SHORT-TERM FINANCING

    1. Which bank offers lower rate?

    Bank A – 12% p.a.

    Bank B – 12% discount rate

    Bank C – 12% discount rate with 20% compensating balance

    Bank D – 12% discount interest with 20% compensating balance with 3% interest

    Bank E – 125 discount interest plus 1% service fee with 20% compensating balance earning 3% interest

    2. ABC Company finances all of its seasonal inventory needs from local bank, Effective Interest rate is
    9%. The firm supplier extends credit that will match 9% bank credit. What terms supplier have to offer?
    a. 2/10, n/60. b. 2/10, n/100. c. 2/10, n/90. d. 3/10, n/60.

    3. Company has just acquired large and need to increase working capital by P100,000. Four sources of
    funds are:

    A. Pay a factor to buy accounts receivable which average P125,000 per month and have average
    collection period of 30 days. Factor will balance up to 80% of face value of receivable at 10% interest
    and charge a fee of 2% on all receivables purchased. The controller estimates saving of P24,000 in
    collection expenses over year. Assume fee and interest are not deductible in advance.

    B. Borrow P110,000 from a bank at 12% interest with 9% compensating balance.

    C. Issue P110,000 of 6-month commercial paper to net P100,000. The new commercial paper issued
    every 6 months.

    D. Borrow P125,000 from a bank on discount basis at 20%.

    Assume 360 days. What is the cost of each alternative?

    OPERATING AND FINANCIAL LEVERAGE

    David Ding Baseball Bat Company currently has $3 million in debt outstanding, bearing an interest rate
    of 12 percent. It wishes to finance a $4 million expansion program and is considering three alternatives:
    additional debt at 14 percent interest (option 1), preferred stock with a 12 percent dividend (option 2),
    and the sale of common stock at $16 per share (option 3). The company currently has 800,000 shares of
    common stock outstanding and is in a 40 percent tax bracket.

    a. If earnings before interest and taxes are currently $1.5 million, what would be earnings per share for
    the three alternatives, assuming no immediate increase in operating profit?

    b. Develop a break-even, or indifference, chart for these alternatives. What are the approx imate
    indifference points? To check one of these points, mathematically determine the indifference point
    between the debt plan and the common stock plan. What are the horizontal axis intercepts?
    c. Compute the degree of financial leverage (DFL) for each alternative at the expected EBIT level of $1.5
    million.

    d. Which alternative do you prefer? How much would EBIT need to increase before the next alternative
    would be “better” (in terms of EPS)?

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