Financing Strategies
•Matching
–Match the maturity of all assets & liabilities
–Reduces liquidity risk
–Hard to implement in practice
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Financing Strategies: Matching, Conservative, Aggressive Approaches & Short-Term Costs, Slides of Fundamentals of E-Commerce
Various financing strategies including matching, conservative, and aggressive approaches. It also covers the cost of short-term credit and sources of short-term financing such as trade credit, accrued expenses, deferred income, short-term bank credit, and commercial paper. Formulas for calculating the annual cost of not accepting a discount and the apr for short-term bank credit and commercial paper.
Typology: Slides
2012/2013
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Financing Strategies
Matching
Match the maturity of all assets & liabilities - Reduces liquidity risk - Hard to implement in practice
Financing Strategies
Conservative Approach
High proportion of long term debt - Less profitable, since LT debt usually moreexpensive
An Optimal Financing Strategy?
No one strategy is “right” for all firms
The mix between ST and LT debt must alsoconsider: - Industry norms - Variability of sales - Variability of cash flows
Cost of Short Term Credit
APR = Interest + Fees Usable funds ×××× 365 Maturity (Days) Simple interest Compound interest m
[
Interest + fees Usable funds
]
- 1 1 + EAR = APR = Annual percentage rateEAR = Equivalent annual returnm = number of compounding periods per year
Trade Credit
Seller provides financing as part of the salesinducement
Spontaneous source of financing - Cost of trade credit is captured in thepurchase price - Trade credit is never free. The cost offoregoing a cash discount is: APR = % discount 100% – % discount 365 Credit – Disc period ×
Example: Cost of Foregoing a
Discount
A vendor offers a discount of 2% if paymentis made within ten days. If the discount isnot taken, full payment is due in 30 days.What is the annual cost of not accepting the2% discount? Percentage Discount 365 APR = 100 - %Discount Credit Period - Discount Peri od 2 365 = 100 - 2 30 - 10 = 37.24% Docsity.com
Short Term Bank Credit
Single loans for specific financial needs
Line of credit - Agreement to borrow up to predetermined limitat any time - Revolving credit - Legally commits the bank - Usually secured - Requires a commitment fee APR = Interest costs Usable funds
Commitment fee × 365 Maturity ( days )
Commercial Paper
Short-term unsecured promissory notes
Issued by large well-known corporations - Maturities from a few days to 9 months - Sold at a discount - Purchasers include corporations, banks,insurance companies, pension funds, etc Maturity ( days ) Interest costs
Placement fee Usable funds ×××× 365 APR =