Chapter 8

the large,
v e to ba nk credit for
An alterna ti mercial
increasingly firm is th e use of com
Firms are
kets prestigious a short-term
foreign mar h ic h represents e
turning to of pap e r w issued by th
cost sourc
es
p ro m issory note
for lower rr o w in unsecu re d
issued at a
rate F in a
may bo h generally
lly ,
funds. They
th e
firm. Thoug means of
ke t m ay f in a n
impersonal
m ar w
Eurodollar e , it is an h e d g is h t o c o c ia l
m an
the s) o r below pri m ” during in g n
t h r o u s id e r t h e a g e r
(foreign d
ollar lo an
th a t m a y “dry up fu tu r
es gh t u se
reign cu rr en cy financing ds. con s h
m a r k e f in a n c f
o
borrow fo ncing perio eque
in an difficult fina n ces e t. ia l
fr o m banks ra te
or cu o
directly er their re d u r r e n c f r a p id The
to lo w ced y ch in t e r
attempt th e f
u tu re
th ro u
gh p
ange
s can t
es
costs.
borrowing s ma a rtic b e
rk e t. ip a t i
o n in

By using
accounts
as colla receivab
teral for le and in
to turn a loan, th ventory
these cu e firm m
quickly rrent as ay be ab
than by sets into le
flow cy waiting ca sh m o
cle. By for the n re
financin using a ormal c
g, the secured a sh
requirem firm tie form of rate or
ents dir s its th e prime
The firm ectly to borrowin
u se e it h e r to that
its asse g
Bankers nd add
to a facto
may also
sell its a t buildu e ir b a se rate a e s of th
s e
p . s th itworthin
r. c c o unts rec LIBOR a e c re d ti n g
eivable g on th m p e n sa
dependin n k s a ls o u se co a s e th e
r. Ba s to incre
custome w e ll as fee
s a s
balance e bank.
yield to th
effective

rm in
y s h o rt te
e u su a ll ating, A firm in search
k lo ans ar s e lf -liquid of short-term fin
Ba n a re fro m be ancing must
r e and o m fu n d s aware of all
na t u f r .A the
paid b
ack e firm arrangements institutional
e in g a t io n s o f th l be that are availabl
b
rm a l o
per r wil e. Trade credit
h e n o g c u sto m e t he from suppliers
is normally the
t tro n with
ially s t ra te form of short-t most available
financ lo w e s
scale d up erm financing
d th e o m e rs and is a natura
o ffe re r c u s t
. outgrowth of
the buying an l
o o th e te g o ry
ra te s t h e ir risk ca goods. d reselling of
ct t
to refle

Mind map
Chapter 8
TRADE CREDIT
The largest provider of short-term credit is
usually at the firm’s doorstep—the
manunfacturer or seller of goods and services.
BANK CREDIT
Banks may provide funds for the financing of
seasonal needs, product line expansion, and
long-term growth. The typical banker prefers
a self-liquidating loan in which the use of
funds will ensure a built-in or automatic
repayment scheme
SHORT-TERM
FINANCING THROUGH
COMMERCIAL PAPER
For large and prestigious firms, commercial
paper may provide an outlet for raising funds.
Commercial paper represents a short-term,
unsecured promissory note issued to the
public in minimum units of $25,000
FOREIGN BORROWING
One approach to borrowing has been to
borrow from international banks in foreign
currencies either directly or through foreign
subsidiaries.
USE OF COLLATERAL IN
SHORT-TERM FINANCING
In any loan the lender’s primary concern,
however, is whether the borrower’s capacity to
generate cash flow is sufficient to liquidate the
loan as it comes due.
ACCOUNTS
RECEIVABLE FINANCING
Accounts receivable financing may include
pledging accounts receivable as collateral
for a loan or an outright sale (factoring) of
receivables
SOURCE OF
FINANCING INVENTORY FINANCING
We may also borrow against inventory to
acquire funds. The extent to which Inventory
financing may be employed is based on the
marketability of the pledged goods, Financing
their associated price stability, and the
perishability of the product.
HEDGING TO REDUCE
BORROWING RISK
Those who are in continual need of borrowed
funds to operate their firms are exposed to the
risk of interest rate changes. One way to
partially reduce that risk is through interest
rate hedging activities in the financial futures
market.
Concept map
Chapter 12
st
inflows mu
pre se nt value of these to be
often The project
Top manag
ement is
the in vestment for a T h re
e im p ac t of excee d e
anxious ab
out th . a n a l y p r im a r y
ns on short
-term acceptable ze ca m e th
od
their decisio
th e p p
the a y b a it a l in v e s s a r e u
income, o f re ck m t
e th o m e n t p ro d to
se
reported ca ital
p The
tu rn ,
and d , th p o sa
of f ir s th e n e in t e r ls :
planning s a w h il e t m e t h o et p nal r
s dictate d is n re se a te
expenditure net
th e l
a st tw o rm a n t v a lu e
horizon. p o lly .
longer time g re a re se n t v a re a c c e u n so u n d
te st a a lu e p t ,
tte n t a b le , w
io n . d e se it h
r v in g
our

As dem
onstrate
forms of d in th
benefits e chapte
are (a) a attribute r, the tw
ftertax o d to an in o
tax shie perating vestmen
ld benefi benefits t e
ts of dep and (b) d uses th
reciatio the
n t v a lu e metho te . In
n. pres e ra
The net iscount
s the d nt,
s t o f c apital a a l a s th e discou
co o f c a p it ro je ct
e co st at a p
using th te , w e affirm th d in g to
, ra n
or hurdle cost of fu
le a s t e arn the n t.
m u st a t tme
an inves
table as
be accep

ctu a l
e a ls with a
d ed
l b udget
ing
a n re p o rt The capital bu
dgeting decisi
Cap it a t h d of on involves the
s ra th e r w instea planning of expe
do ll a r
sh f lo in the nditures for a pr
g s, ca u se d life of at le oject with a
ea r n in e is ast one year
com and usually
ting in considerably lo
o p e ra nger.
n.
decisio

Mind map
Chapter 12
ADMINISTRATIVE
CONSIDERATIONS
The search for new opportunities is often the
least emphasized, though perhaps the most
important, of the four steps. The collection of
data should go beyond engineering data and
market surveys and should attempt to capture
the relative likelihood of the occurrence of
various events.
ACCOUNTING FLOWS
V CASH FLOW
In most capital budgeting decisions the
emphasis is on cash flow, rather than reported
FIOWS Versus income.
THE CAPITAL
BUDGETING
SELECTION DECISION
STRATERGY
In both the internal rate of return and net
present value methods, the profitability must
Selection equal or exceed the cost of capital
for the project to be potentially acceptable.
However, Strategy other distinctions are
necessary—namely, whether the projects are
mutually exclusive or not.
CAPITAL RATIONING
At times management may place an artificial
constraint on the amount of funds that can be
invested in a given period.
NET PRESENT VALUE
PROFILE
An interesting way to summarize the
characteristics of an investment is through the
use of the net present value profile. The profile
allows us to graphically portray the net present
value of a project at different discount rates.
COMBINING CASH FLOW
ANALYSIS AND SELECTION
STRATEGY
Many of the points that we have covered
thus far will be reviewed in the context of a
capital budgeting decision, in which we
determine the annual cash flows from an
investment and compare them to the initial
outlay. To be able to analyze a wide variety
of cash flow patterns, we shall first
consider the types of allowable
depreciation.
ACTUAL INVESTMENT
DECISION
Investment decision refers to financial resource
allocation. Investors opt for the most suitable
assets or investment opportunities based on
risk profiles, investment objectives, and return
expectations.
ELECTIVE
EXPENSING
Writing off an asset in the year of purchase
rather than depreciating it over the life of the
asset. The maximum annual deduction is
$250,000. This procedure is primarily beneficial
to small businesses because its availability is
phased out when asset purchases become
large.
Concept map