2.1.1. Short-term debt and liabilities

Question 1

Definition | Trade Credit [Handelskredit] / Supplier Credit

1.
2.
3.
4.
5.

Answer 1

• in practise, very important form of financing
• granting payment period within the terms of payment, e.g. payable 30 days net
• in balance sheet of the receiving company: trade payables
• rationale: sales promotion by supplier
• in essence, a short term loan from the selling firm to its customer

Question 2

Trade Credits

Terms of payment are component of…

Answer 2

… price calculation, possibly “hidden discount” by granting cash discount (or implicit financing cost)

Question 3

Cash discount | Definition

Answer 3

possbilitly of deduction from the invioce amount granted in the terms of payment if payment is made within a certain period of time

Question 4

Trade Credit and the choice of two mutually exclusvie alternatives

Answer 4

1. use of cash discount or
2. use of supplier credit

Question 5

Short term financing with trade credit -> Discount

Answer 5

= interest expense (when not using the discount) of the trade credit

Question 6

Utilization of trade credit may be an indication of…

Answer 6

…payment difficulties on the part of the person entitled to the cash discount

Question 7

payment on the las day of the discount period almost always…

Answer 7

…makes sense

Question 8

Bilateral bank loan (bullet) | Definition

Answer 8

firm pays interest on the principal loan amount and pays back the principal at maturity

Question 9

Line of credit | Definition

1.
2.
3.

Answer 9

• bank agrees to lend firm any amount up to a maximum available credit volume
• firm can pay back (parts of) utilized credit amount and can draw undrawn portion of credit line mutliple times during tenor
• this agreement offers high degree of flexibility to debtor

Question 10

Bridge loan | Definition

Answer 10

“bridge of the gap” until a firm can arrange for long-term financing, e.g. in M&A transactions

Question 11

What are the possibilities of short term financing with bank loans?

1.
2.
3.

Answer 11

• bilateral bank loan (bullet)
• line of credit
• bridge loan

Question 12

Commercial papers | Definition

1.
2.
3.
4.

Answer 12

• short term, unsecured debt used by large corporations
• usually a cheaper source of funds than a short term bank loan
• average maturity between 30 days and maximum maturity of 365 days
• usually issuance under framework agreement between issuing company and dealing banks to handle the issuance process

Question 13

If a supplier offers its customer terms of “Net 30”, payment…

“2/10, Net 30” means that…

Answer 13

is not due until 30 days from the date of the invoice

… the buying firm will receive a 2% discount if it pays for the goods within 10 days; otherwise, the full amount is due in 30 days

Question 14

The price discount represents …

Answer 14

…. an interest rate