Corporate Issuers Level 1

Chapter 3
a. describe types of financing methods and considerations in their
selection

There are different types of financing

● Internal Financing
● Financial Intermediaries
● Capital Markets
● Other Financing
a. describe types of financing methods and considerations in their
selection

Internal Financing

operating cash flows = net income + depreciation - dividend payments

Accounts payable / accounts receivable

Managing inventories

Invest cash in marketable securities as cas does not pay interest

a. describe types of financing methods and considerations in their
selection

Financial Intermediaries

Banks and other lenders can provide different means of financing

- Lines of credit - committed or uncommitted

- Revolving credit agreement
- Asset based loans
a. describe types of financing methods and considerations in their
selection

Capital markets

- Cormmercial Paper
- Equities or common stock
- Preferred stocks
- Loans - Notes or Bonds
- Other hybrid securities
a. describe types of financing methods and considerations in their
selection

Other financing

- Lease
a. describe types of financing methods and considerations in their
selection

Considerations affecting financing choices

- company size
- riskiness of assets
- assets for collateral
- public vs. private equity
- asset liability management
- debt maturity structure
- currency risks
- agency costs
b. describe primary and secondary sources of liquidity and factors that
influence a company's liquidity position

- Liquidity is the ability for the company to meet short term obligation
- Using assets that could be converted into cash

Primary source of liquidity

Cash, short term funds, trade balance, lines of credit…

Secondary source of liquidity

Negociating debt contracts, liquidating assets, filing for bankruptcy. These
operations could generate additional cost or have an impact on running the
business
b. describe primary and secondary sources of liquidity and factors that
influence a company's liquidity position

A company’s liquidity position is affected by

Drag on liquidity reduces cash inflows

Increase in account receivable, inventory obsolescence and lower access to capital

Pull on liquidity increases cash outflows

Early payment to suppliers, reduced credit limits from suppliers

c. compare a company's liquidity position with that of a peer companies

Measuring liquidity

Current Ratio = Current Assets / Current liabilities

Quick Ratio (acid-test ratio) = (Cash + marketable securities + receivables) / Current Liabilities

Cash Ratio = (Cash + marketable securities) / Current Liabilities

c. compare a company's liquidity position with that of a peer companies

Activity ratios

receivables turnover = credit sales / average receivables

inventory turnover = COGS / average inventory

number of days of inventory = average inventory / (COGS/365)

payables turnover = purchases / average trade payables

number of days of payables = average accounts payable / (Purchases/365)

d. evaluate choices of short-term funding

The major objectives of a short-term borrowing strategy:

- handle peak cash needs.

- Maintain sufficient sources of credit.
- Ensure that rates obtained are cost-effective