Ray has asked you to review the companys short-term financing policies and prepare a report to help

Question:

Ray has asked you to review the company’s short-term financing policies and prepare a report to help him with SSP’s future working capital financing decisions. To assist you in getting started, he has prepared some questions that, when answered, will give Ray a better idea of the company’s short-term financing policies.
a. What is short-term credit, and what are the major sources of this credit?
b. Is there a cost to accruals, and do firms have much control over them? What is trade credit?
c. Like most small companies, SSP has two primary sources of short-term debt: trade credit and bank loans. One supplier, which supplies SSP with $50,000 of materials each year, offers purchases on terms of 2/10, net 50.
(1) What are SSP’s net daily purchases from this supplier?
(2) What is the average level of SSP’s to this supplier if SSP takes the discount? What is the average level if it does not take the discount?
(3) What is the approximate cost of financing if SSP does not take the discount? What is its effective annual cost?
d. In discussing a possible loan with the firm’s banker, Ray has found that the bank is willing to lend SSP a maximum of $800,000 for one year at a 9 percent simple, or quoted, rate. Unfortunately, he forgot to ask what the specific terms would be.
(1) Assume that the firm will borrow $800,000. What would be the effective interest rate if the loan required interest to be paid at the end of the year (not a discount interest loan)? If the loan had been an 8 percent interest loan for six months rather than for one year, would that change affect the effective annual rate?
(2) What would be the effective rate if the loan were a discount interest loan? Assume the loan is a one-year loan.
(3) Assume that the bank requires interest to be paid at the end of the year and it requires the firm to maintain a 20 percent compensating balance. What is the effective annual rate on the loan? Assume that SSP does not have any funds in a checking account at the bank.
e. SSP is considering using secured short-term financing. What is a secured loan? What two types of current assets can be used to secure loans?
f. What are the differences between pledging receivables and factoring receivables? Is one type generally considered better?
g. What are the differences among the three forms of inventory financing? Is one type generally considered best?

Accounts Payable
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