Financial/Capital Structure Flashcards
What is the financial structure?
Mix of liabilities and owners equity of a firm
Includes current and non current liabilities and Owners Equity
What is capital structure?
The LONG-TERM funding (LT DEBT and OE)
What is short-term financing and give examples?
Short-term (working capital financing)- funds provided by obligations that become due within one year.
Primary forms:
- Trade AP
- Accrued AP (wages, taxes)
- Short-term NP
- Letters of Credit
- Commercial Paper
- Pledging and factoring AR
- Inventory Secured Loans
Define payables?
Acquiring goods or services financed to be paid in the future
Widely used
What are advantages of AP, what are disadvantages?
- Flexible method (expand and contract
- Interest is normally not charged
- Collateral normally not required
- Discounts often are offered for early payment
Disadvantages:
- Require payment in the short term
- The effective cost is higher if discounts are not taken
- Financing they provide is use specific
What are accrued AP?
Result from acquiring cash and other benefits financed by an obligation to be satisfied in the future
- Examples: Salaries, taxes, unearned revenue, etc.
- The time between when the benefit is received and paid is accrued AP.
What are advantages and disadvantages of accrued AP?
ADV:
- Easy to use
- Flexible- expand and contract with activity
- Collateral is normally not required
DIS:
- Require payment in the short-term
- Some financing is use specific
What is ST- NOTE PAYABLE? What is compensating balance? What are the adv and dis?
What is commercial paper? What are the advantages and disadvantages?
Result from acquiring cash through borrowing with repayment due in one year or less
Promissory note is required
Interest rate is based on credit rating of the borrower
A compensating balance may be required
- An amount that must be maintained in the account
ADV:
- Available for credit worthy firms
- Flexible
- Collateral normally not required
- Provide cash for various purposes
DIS:
- Poor credit = higher interest
- Required repayment in Short term
- Compensating balance would increase the effective cost and reduce funds available
- Refinancing would be necessary, if the note cannot be paid
Standby Credit and Commercial Paper, what is it?
What is it? Arrangement to have financing available for a specific purpose
Three types:
1) Line of credit- Informal agreement whereby a an institution agrees to a maximum amount of credit for an extended period of time (provides a reasonable assurance of funds, available funds generally can be used for any purpose
2) Formal agreement whereby a financial institution or other lender agrees to maximum amount of credit
3) Letter of credit: A conditional commitment by a financial institution to pay a third party in accordance with specified terms and conditions
- Payment to a 3rd party upon proof of shipment of goods
- Often used in foreign transactions
ADVANTAGES:
- Commonly available for creditworthy firms
- Highly flexible, credit used
- Usually no collateral required
DIS:
- Higher interest rate for poor credit ratings
- Involves a fee
- Require satisfaction in the short-term
- Require a compensating balance increase effective cost and reduce funds available for use
- Line of credit not legally binding on the financial institution
What is commercial paper?
- Short-term, unsecured promissory notes sold by large credit worthy firms
- Most are 180 days or less
- If more than 270 days SEC registration is required
- May be sold directly to investors or through dealers
ADVANTAGES:
- Interest rates are lower than other ST sources
- Large amounts can be obtained
- Compensating balances are not required
- No collateral
DISADVANTGE:
- Only available to the most credit worthy firms
- Requires satisfaction in the short-term
- Lacks flexibility
What is pledging AR? What is factoring AR (Recourse vs Non-recourse)? What are advantages and disadvantages of each?
Using AR as security for short-term borrowings. Level of borrowing available for a set of AR. Credit worthiness of AR and level of lenders recourse against the borrower.
DISADVANTAGE: A fee is usually charged, accounts are committed as security-loose control, cost of pledging may be greater than other sources of ST- financing
ADVANTAGE: Flexible, compensating balance not required, etc.
FACTORING:
Factoring is the SALE of AR
- Without recourse: The factor bears the risk associated with collectability, except in the case of fraud
- With recourse- The factor has recourse against the seller for some or all of the risk associated with uncollectability of the receivables
Disadvantage: Charges a fee based on credit worthiness and collectability.
- Cost may be more than other ST financing
- Sold with recourse
- Sale of AR may alienate your customers
Advantages:
- Common available
- Flexible
- Compensating balances are not required
- Provides cash for general use
What are inventory secured loans? What are the different types of agreements? How is cost determined? What are the advantages and disadvantages?
Occur when a firm pledges all or part of its inventory as collateral for a short-term loan.
- Floating lien agreement- Borrower gives a lien on all of its inventory, but retains control of its inventory which it continuously sells and replaces
- Chattel mortgage agreement- Lien against specifically identified inventory, borrower retains control of that inventory, cannot be sold without lenders approval
- Field house agreement- Inventory remains at the borrowers warehouse, but under the control of an independent third party
- Terminal warehouse agreement- Inventory is moved to a public warehouse and placed under the control of an independent third party
What is the cost?
- Nature of the inventory
- Credit standing of the borrower
- Speci type of agreement used
Advantages:
- commonly available to certain inventories
- Flexible
- Provide cash for general use
Disadvantages
- Inventory may not be available when needed
- Cost of using inventory secured loans may be greater than other short-term financing
- May require repayment in short-term
- Not available for certain inventories
