Part 5 Working Capital Management

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Fall 2008

• Chapter 21
• Part 5Working Capital Management

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SHORT-TERM BANK LOANS

• On the balance sheet, short-term bank loans is
  represented by the account _____.
• Short-term bank loans are a _____ source of
  funding.
• They are crucial because they are the prime
  source of funding the _____ gap.

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Advantages of short-term bank loans

• Obtained _____ than long-term sources of funding.
  
• More appropriate for funding _____ needs.
  
• Short-term loans normally carry a _____ i-rate
  than long-term loans.

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Disadvantages of short-term bank loans

• Short-term i-rates are much more _____ than l.t.
  i-rates.
• Short-term debt must be refinanced _____
  frequently, and the ability to refinance may be
  in question in a _____.

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Features of short-term bank laons

• Often written as _____-day notes.
• Short-term bank loans are a _____ specifying
  amount borrowed, interest rate, repayment
  schedule, collateral (if any), and any other
  agreed-upon terms.

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• May require _____ of 10-to-20 of the loans face
  value.
• This _____ the effective interest rate on the
  loan, but the practice is _____ common now than
  in the past.

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Forms of short-term credit

• A _____ is a bank guarantee to make funds
  available if company cannot or will not make
  payment.
• A _____ allows the company to automatically
  borrow up to a pre-specified limit.
• - line is not guaranteed with a _____ clause
  (material adverse change).
• - typically require 30-60 days of a _____
  balance to ensure line is not being used as
  long-term financing.

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• A _____ is a more formal version of a line of
  credit.
• - bank is _____ to provide the line (often a for
  2-5 year period)
• - restrictive covenants are required
• - commitment fees are charged on _____ portion
  of the line
• - more common with _____ companies

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• Example - Assume that Smith Corp has established
  a 50 million revolving credit agreement at an
  i-rate of 6 and with a commitment fee rate of
  1.2. If it uses 40 million of the line for
  eight months (and none of the line for the other
  four months), what are its total fees for the
  year? What is the nominal cost of providing the
  funds used?

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• The recent trend is for banks to issue _____ that
  act as a committed line of credit.
• - Wells Fargo offers _____ businesses a credit
  card of this sort.
• - Groups of banks may participate together in
  issuing credit cards for _____ companies.

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BANKERS ACCEPTANCE

• Process
• A US company importing goods (buyer) requests a
  US bank to issue a _____ ensuring payment.
• The US bank authorizes the foreign exporter
  (seller) to draw a _____ on the letter of credit
  in payment for goods delivered.

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• The exporter can _____ the time draft with its
  foreign bank, receiving payment immediately.
• The foreign bank forwards the time draft to the
  US bank.
• Once accepted by the US bank, the time draft
  becomes a _____ (a bankers acceptance) that
  trades in the money market until maturity.

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COMMERCIAL PAPER

• _____ promissory note (although backed by a line
  of credit or letter of credit)
• Maximum maturity is _____ days, 30 days is most
  common.
• Most is sold on a _____ basis, although some are
  interest-bearing.
• Only very _____, financially sound firms can sell
  commercial paper.

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• Heaviest sellers of commercial paper are _____
  companies.
• Commercial finance and bank holding companies
  sell paper directly to investors, while paper of
  nonfinancial companies is underwritten by
  commercial paper dealers (called _____).

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• Commercial paper yields are only slightly higher
  than _____ yields.
• This makes commercial paper the _____ source of
  funding available to businesses.
• (Author) April 2005
• iprime5.75 iT-bills 2.82 iCP3.09

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Commercial paper ratings

• Primary agencies that rate commercial paper are
  Standard Poors, Moodys, Fitch Investor
  Services Corp, and Canadas Dominion Bond Rating
  Service Ltd.
• Ratings range from A to D with refinements like
  A1 to A3, and finally a for the strongest
  firms. So, the highest possible rating is _____
  .
• Higher ratings mean _____ yields.

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Pros and cons of commercial paper as a source of
funds

• Primary advantage
• Lowest-_____ source available
• Primary disadvantages
• very impersonal extensions _____ feasible
• commercial paper market disappears in _____

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Euro commercial paper

• Many top-rated US corporations now issue
  commercial paper targeted for _____ investors.
• Advantages
• - not subject to _____ requirements
• - not typically _____
• - back-up lines of credit _____ typically
  required

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• Comparison to US market
• - Euro CP maturities are typically _____
  (usually in 60-90 day range)
• - Euro CP issued by US companies face shorter
  effective maximum maturity of _____ days because
  of US _____ considerations

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Securitization of commercial paper

• Some commercial paper is _____ by a pool of
  financial assets (mortgages, auto loans, credit
  card receivables).
• This type of commercial paper is issued by _____
  to raise funds.

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USE OF SECURITY IN SHORT-TERM FINANCING

• This topic is deferred to Chapter 22