1. Copyright © 2003 Pearson Education, Inc. Slide 15-0 Ch 15 Learning Goals 1.Evaluate the decision to take cash discounts on trade credit. 2.Calculate effective annual interest rate on short-term loans. 3.Characteristics of secured short-term loans and the use of current assets as collateral.

2. Copyright © 2003 Pearson Education, Inc. Slide 15-1 Spontaneous Liabilities _________________________ liabilities arise from the normal course of business. The two major spontaneous liability sources are accounts payable and accruals. There is normally no explicit cost of these current liabilities. Accounts payable are a major source of S-T financing for most firms

3. Copyright © 2003 Pearson Education, Inc. Slide 15-2 Spontaneous Liabilities Analyzing Credit Terms If a supplier offers a cash discount, the firm must decide whether or not to take the cash discount. If a firm opts to take a cash discount, it should pay on the ______________________ of the discount period. If a firm chooses to give up the cash discount, it should pay on the final day of the credit period.

4. Copyright © 2003 Pearson Education, Inc. Slide 15-3 Cost = 2% x 360 = 36.73% 100% - 2% 30 - 10 Spontaneous Liabilities Giving Up the Cash Discount

5. Copyright © 2003 Pearson Education, Inc. Slide 15-4 Unsecured Sources of Short-Term Loans The major type of loan made by banks to businesses is the short-term loan, intended to meet seasonal needs. Short-term bank loans come in three basic forms: –single-payment _________________ –______________________________ (LOC) –______________________________ credit agreements (RCA) Bank Loans

6. Copyright © 2003 Pearson Education, Inc. Slide 15-5 Unsecured Sources of Short-Term Loans Bank Loans Most banks loans are based on the prime rate The rate paid by most borrowers is “_______________” a premium added to the prime rate based on the borrower’s riskiness. Loan Interest Rates

7. Copyright © 2003 Pearson Education, Inc. Slide 15-6 Unsecured Sources of Short-Term Loans Bank Loans On a fixed-rate loan, the rate of interest is determined when the loan is taken out and remains at that rate until maturity. On a floating-rate loan, the increment above the prime rate is initially established and the rate then floats with prime until maturity. Fixed & Floating-Rate Loans

8. Copyright © 2003 Pearson Education, Inc. Slide 15-7 Unsecured Sources of Short-Term Loans Bank Loans A line of credit is an agreement between a commercial bank and a business specifying the maximum amount of credit the bank will provide over a given period of time. A LOC is _________________ guaranteed. A revolving credit agreement is similar, but ________ guaranteed. Both LOCs and revolving credit agreements often require compensating balances. Lines of Credit (LOC)

9. Copyright © 2003 Pearson Education, Inc. Slide 15-8 Unsecured Sources of Short-Term Loans Bank Loans Revolving Credit Agreements (RCA) Because a RCA is guaranteed, the bank typically charges a _______________________________ Although more expensive than a LOC, the RCA is less risky from the borrower’s perspective.

10. Copyright © 2003 Pearson Education, Inc. Slide 15-9 Secured Sources of Short-Term Loans Characteristics Collateral reduces the lender’s loss in the case of default Lenders prefer to match the life of the collateral with the life of the loan. For short-term loans, accounts receivable and inventory are frequently used as collateral.

11. Copyright © 2003 Pearson Education, Inc. Slide 15-10 Secured Sources of Short-Term Loans Characteristics The loan itself is normally for 30 to 90 percent of the book value of the collateral. The interest rate charged on secured loans is typically _______________________ than on unsecured debt. In addition, lenders often add a service charge for secured loans.