Financing Options Flashcards
Describe the components of a firm’s financial structure.
All elements of liabilities (current and non-current) and owners’ equity of a firm constitute its Financial Structure
What are “Financing Options”?
The alternative ways that funding may be obtained to carry out capital projects and other undertakings of an entity.
Which is more inclusive, capital structure or financial structure?
Financial Structure, which includes current and non-current liabilities, as well as owners’ equity. Capital Structure does not include current liabilities, only long-term debt and owners’ equity.
Describe the components of a firm’s capital structure.
All elements of long-term debt and owners’ equity.
Identify at least five forms of short-term financing.
Trade accounts payable. Accrued accounts payable. Short-term notes. Lines of credit, revolving credit or letter of credit. Commercial paper. Pledging accounts receivable. Factoring accounts receivable. Inventory secured loans.
Describe the concept of short-term financing.
Obtaining funding through obligations (debt) that must be repaid within one year (current liabilities), or
The use of current assets to obtain funding.
What is the meaning of cash discount terms of “2/10, n/30”?
The term 2/10, n/30 is a typical credit term and means the following:
The first digit (2) is the percent discount offered by the seller;
The second digit (10) is the number of days within which the discount is available;
n/30 indicates that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 30 days after the sales invoice date.
Why are cash discounts offered on trade accounts?
Cash discounts are offered to encourage early payment of amounts due on trade accounts.
What are the disadvantages of using short-term notes for short-term financing purposes?
Poor credit rating = High interest rate;
Requires satisfaction in the short term;
May require compensating balance or security.
Define “compensating balance”.
An amount that a borrower may be required to maintain in a demand deposit account with a lender as a condition of receiving a loan or other bank services.
List the advantages of using short-term payables (for financing purposes).
Ease of use; Flexible; Usually interest free; Usually no security required; Discounts may be offered for early payment.
Describe trade accounts payable (also called trade credit) as a means of short-term financing.
Deferred payment for goods or services provided by suppliers in the normal course of business. May carry the offer of a cash discount for early payment of obligation.
List the disadvantages of using short-term payables (for financing purposes).
Requires payment in the short-term;
Use specific;
Lost discounts increase cost.
List the advantages of short-term notes (for financing purposes).
Commonly available for creditworthy firms;
Flexible - amounts and periods (within one year) can be varied;
Generally, no collateral required;
Provides cash.
Why are cash discounts offered on trade accounts?
Cash discounts are offered to encourage early payment of amounts due on trade accounts.
