M2-B5

Question 1

Factoring

Answer 1

• turning over collection of accounts receivable to a 3rd party factor in exchange for a discounted ST loan
• minimizes collection float

Question 2

Debt Covenants

Answer 2

-creditors use these to protect their interests by limiting actions of debtors that may negatively affect the position of the creditor

Question 3

Line of Credit

Answer 3

• revolving loan with a bank up to a specific amount for a specific amount of time and is renewable @maturity date
• outstanding balances reduce future availability of funds that can be drawn

Question 4

Borrowing Capacity (limit)

Answer 4

• amount of money in the form of credit or loans that a given lender (bank) is willing to lend to the company
• determined by collateral and credit rating

Question 5

Short-term financing advantages

Answer 5

• lower ST interest rates

- increased profitability and liquidity

Question 6

Short-term financing disadvantages

Answer 6

• Interest rates are more volatile
• may require greater financing charges than anticipated on future refinancing
• must have rapid conversion of inventory and receivables to meet ST debt

Question 7

Long-term financing advantages

Answer 7

• lower fluctuation in rates
• reduces risk of refinancing denial or modification
• increases financial leverage

Question 8

Long-term financing disadvantages

Answer 8

-higher interest rates which decrease profitability

Question 9

Accounts receivable on BS

Answer 9

Sales per day * A/R avg days outstanding