The document discusses different types of bank loans including simple interest loans, discount interest loans, and secured short term financing options like pledging accounts receivable. It provides formulas for calculating effective interest rates of simple interest loans and examples of calculating the effective annual rate of a loan using accounts receivable as collateral. The document also covers basic concepts in financial structure, capital structure, and tools for managing capital structure.
The document discusses different types of bank loans including simple interest loans, discount interest loans, and secured short term financing options like pledging accounts receivable. It provides formulas for calculating effective interest rates of simple interest loans and examples of calculating the effective annual rate of a loan using accounts receivable as collateral. The document also covers basic concepts in financial structure, capital structure, and tools for managing capital structure.
The document discusses different types of bank loans including simple interest loans, discount interest loans, and secured short term financing options like pledging accounts receivable. It provides formulas for calculating effective interest rates of simple interest loans and examples of calculating the effective annual rate of a loan using accounts receivable as collateral. The document also covers basic concepts in financial structure, capital structure, and tools for managing capital structure.
The document discusses different types of bank loans including simple interest loans, discount interest loans, and secured short term financing options like pledging accounts receivable. It provides formulas for calculating effective interest rates of simple interest loans and examples of calculating the effective annual rate of a loan using accounts receivable as collateral. The document also covers basic concepts in financial structure, capital structure, and tools for managing capital structure.
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Cost of Bank Loans
1. Simple Interest 2. Discount interest 3. Add-on Interest 4. Simple Interest with Compensating Balance 5. Discount Interest with Compensating Balance SIMPLE INTEREST In a single interest loan, the borrower receives the face value of the loan and repays the principal and interest at maturity date.
Formula to compute the effective interest rate is:
Interest Effective annual rate simple = Face Value Interest Compute the effective annual interest rate for a one-year loan of P200,000 at 10% annual interest per year payable at maturity. P20,000 Effective annual rate simple = P200,000
*Simple interest loan of 1 year or more: nominal rate = effective rate
If the loan had a term of less than 1 year, say 90 days, the effective annual rate would be calculated as follows: Secured Short Term Financing
1. Pledging of Accounts Receivable
2. Factoring of Accounts Receivable 3. Inventory Loans with a. floating of blanket lien b. chattel mortgage c. field warehouse financing agreement d. terminal warehouse receipt Pledging Accounts Receivable The borrower simply pledges or assigns accounts receivable as a security for a loan obtained from either a commercial bank or finance company.
All AR are pledged 75% and below
Selected AR are pledged up to 85% or 90% The XYZ Company sells plumbing supplies to building contractors on terms of net 60. The firms average monthly sales are 100,000; thus its average accounts receivable balance is 200,000, based on the two months credit period. The company pledges all its receivables to a local bank, which in turn advances up to 70% of the face value of the receivables at 3% over prime and with a 1% processing charge on all receivables pledged. XYZ Company follows a practice of borrowing the maximum amount possible. The current prime rate is 12%. What is the effective cost of using this source of financing for a full year? The effective cost of this loan is computed as follows: (P200,000 x 70% x 15%) + 1% x P100,000 x 12 mos. 1 Effective annual rate = x 70% x P200,000 360
P21,000 + P12,000 1 360
= x P140,000 360 360 In the preceding example, XYZ Company may save credit department expenses of P15,000 per year by pledging all its accounts and letting the lender provide those services.
P21,000 + P12,000 - P15,000 1
Effective annual rate = x P140,000 360 P18,000 1 360 = x P140,000 360 360
* Advantage of Pledging Flexibility
**Disadvantage of Pledging Cost Basic Concepts Financial structure is the mix of all assets which appear on the right hand side of the companys statement of financial position while Capital structure pertains to the mix of long- term sources of funds.
Financial Structure Current Liabilities = Capital Structure
Financial Structure design necessitates consideration of the
following issues: 1) What should be the maturity composition of the firms sources of funds? 2) What should be the proportion of the various forms of financing to be utilized to the total financing required? Basic Tools of Capital Structure Management
Capital can come from debt or equity.
The use of debt tends to increase earnings per share which lead to a higher stock price. The use of debt also increases the risk borne by shareholders, which lowers the stock price. If the actual debt ratio is below the target level, expansion capital will probably be raised by issuing debt. If the debt ratio is above the target, equity will probably be used.
Money and banking ررقملا مسا Economics مسقلا حيمس اشر ذاتسلاا مسا Differentia between direct and indirect finance refer to different category and types of both kind of finance ثحبلا ناونع
Money and banking ررقملا مسا Economics مسقلا حيمس اشر ذاتسلاا مسا Differentia between direct and indirect finance refer to different category and types of both kind of finance ثحبلا ناونع
