Tài chính doanh nghiệp - Chapter 9: Short - Term debt

Chapter 9Short-term DebtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesOverview of the characteristics of various short-term (S-T) debt instrumentsDifferent typesSources (lenders)Issuing entities (borrowers)Advantages and disadvantagesUnderstand how short-term debt instruments are pricedCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation (cont.)9.8 Negotiable Certificates of Deposit9.9 Investment Bank Cash Advance Facility9.10 Inventory Loans, Accounts Receivable Finance, and Factoring9.11 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.1 IntroductionShort-term debt is a financing arrangement for a period of less than one year with various characteristics to suit borrowers particular needsTiming of repayment, risk, interest rate structures (variable or fixed) and the source of fundsMatching principleShort-term assets should be funded with short-term liabilitiesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.2 Trade CreditA supplier provides goods or services to a purchaser with an arrangement for payment at a later dateOften includes a discount for early payment (e.g. 2/10, n/30 i.e. 2% discount if paid within 10 days, otherwise the full amount is due within 30 days)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.2 Trade Credit (cont.)The opportunity cost of the purchaser foregoing the discount on an invoice (1/7, n/30) isCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.3 Intercompany LoansDirect borrowing and lending between large, credit-worthy companiesTypically, lenders are insurance and finance companies, and major retailers with short-term surplus fundsBrokers and merchant banks are used to locate and place fundsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.3 Intercompany Loans (cont.)Loans are normally unsecured; thus, the credit risk of the borrower is criticalCredit risk is the risk that a borrower will not make interest and principal repayments when dueLoans are eitherOvernight money (11 a.m.)24-hour call loansRecallable or renegotiable after 7 daysCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.4 Bank OverdraftsMajor source of short-term financeAllows a firm to place its cheque (operating) account into deficit, to an agreed limitGenerally operated on a fully fluctuating basisLender also imposes an establishment fee, monthly account service fee and a fee on the unused overdraft limitCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.4 Bank Overdrafts (cont.)Interest rates negotiated with bank at a margin above an indicator rate—reflecting the borrower’s credit riskFinancial performance and future cash flowsLength of mismatch between cash inflows and outflowsAdequacy of collateralIndicator rate may be either bank’s prime rate or published market rateCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial BillsA bill of exchange is a discount security issued with a face value payable at a future dateA commercial bill is a bill of exchange issued to raise funds for general business purposesA bank-accepted bill is a bill issued by a corporation that incorporates the name of a bank as acceptorCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Features of commercial bills—parties involved (bank-accepted bill)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Features of commercial bills—parties involved (bank-accepted bill) (cont.)DrawerIssuer of the billSecondary liability for repayment of the bill (after the acceptor)AcceptorUndertakes to repay the face value to the holder of the bill at maturityAcceptor is usually a bank or merchant bankCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Features of commercial bills—parties involved (bank-accepted bill) (cont.)PayeeThe party to whom the bill is specified to be paid i.e. the party who receives the fundsUsually the drawer, but the drawer could specify some other party as payeeDiscounterThe party that discounts the face value and purchases the billThe provider or lender of the fundsMay also be the acceptor of the billCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Features of commercial bills—parties involved (bank-accepted bill) (cont.)EndorserThe party that was previously a holder of the billSigns the reverse side of the bill when selling, or discounting, the billOrder of liability for payment of the bill runs from acceptor to drawer and then to endorserCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)The flow of funds (bank-accepted bills)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)The flow of funds (non-bank bills)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Establishing a bill financing facilityBorrower approaches bank or merchant bankAssessment made of borrower’s credit riskCredit rating of borrower affects size of discountMaturity usually 30, 60, 90, 120 or 180 daysMinimum face value usually $100,000Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.5 Commercial Bills (cont.)Advantages of commercial bill financingLower cost than other short-term borrowing forms (i.e. overdraft, fully-drawn advances)Borrowing cost (yield) determined at issue date (not affected by subsequent changes in interest rates)Term of loan may be extended by ‘roll-over’ at maturityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 CalculationsCalculating price—yield known(9.1)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating price—yield known (cont.)Example 3: A company decides to fund it short-term inventory needs by issuing a 30-day bank-accepted bill with a face value of $500,000. Having approached two prospective discounters, the company has been quoted yields of 9.52 per cent per annum and 9.48 per cent per annum. Which quote should the company accept, and what amount will the company raise?Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating face value(9.2)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating face value (cont.)Example 4: A company needs to raise additional funding of $500,000 to purchase inventory. The company has decided to raise the funds through the issue of a 60-day bank-accepted bill rollover facility. The bank has agreed to discount the bill at a yield of 8.75 per cent. At what face value will the initial bill be drawn?Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating yield(9.3)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating yield (cont.)Example 7: In Example 3, a company issued a 30-day bank-accepted bill with a face value of $500,000. The bill was discounted at a yield of 9.48 per cent per annum, representing a price of $496,134.23. After seven days the discounter sells the bill in the short-term money market for $497,057.36. Assume the bill is not traded again in the market, calculate the yield to the original discounter and to the holder at maturity.Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating yield (cont.)Example 7 (cont.) Yield to original discounter: Yield to holder at maturity:Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating price—discount rate known(9.4)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating price—discount rate known (cont.)Example 8: The price of a 180-day bill, with a face value of $100,000, selling at a discount of 14.75 per cent, would be:The discount in this formula is effectively the rate of return to the buyer of the bill (or the cost of funds to the drawer of the bill), expressed as a percentage per annum, in relation to the face value of the bill.Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating discount rate(9.5)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.6 Calculations (cont.)Calculating discount rate (cont.)Example 9: A 180-day bill with a face value of $100,000 and selling currently at $92 000, with a full 180 days to run to maturity, has a discount rate of:Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation9.1 Introduction9.2 Trade Credit9.3 Intercompany Loans9.4 Bank Overdrafts9.5 Commercial Bills9.6 Calculations9.7 Promissory NotesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.7 Promissory NotesAlso called P-notes or commercial paper, they are discount securities, issued in the money market with a face value payable at maturity, sold today by the issuer for less than face value There is no acceptor or endorserTypically available to companies with an excellent credit reputation as unsecuredCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.7 Promissory Notes (cont.)Calculations—use discount securities formulaeIssue programsUsually arranged by major commercial banks and money market corporationsStandardised documentationRevolving facilityMost P-notes are issued for 90 days, byTender, tap issuance and/or dealer bidsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.7 Promissory Notes (cont.)Underwritten issuesUnderwriting guarantees the full issue of notes is purchasedUnderwriter is usually a commercial bank, investment bank or merchant bankThe underwritten issue can incorporate a roll-over facility, effectively extending the borrower’s line of credit beyond the short-term life of the P-note issueIssues may also be non-underwrittenCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation (cont.)9.8 Negotiable Certificates of Deposit9.9 Investment Bank Cash Advance Facility9.10 Inventory Loans, Accounts Receivable Finance, and Factoring9.11 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.8 Negotiable Certificates  of DepositS-T discount security issued by banksMaturities range up to 180 daysIssued to international investors in the wholesale money marketThe short-term money market has an active secondary market in CDsCalculations—use discount securities formulaeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation (cont.)9.8 Negotiable Certificates of Deposit9.9 Investment Bank Cash Advance Facility9.10 Inventory Loans, Accounts Receivable Finance, and Factoring9.11 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.9 Investment Bank Cash Advance FacilityMade available to larger corporationsGenerally for a term of a number of years but also available S-TPriced at a margin above a reference rate, reviewable for longer-term loansReference rate fixed for S-T loans (up to 180 days) but will be periodically reviewed for longer-term loansCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation (cont.)9.8 Negotiable Certificates of Deposit9.9 Investment Bank Cash Advance Facility9.10 Inventory Loans, Accounts Receivable Finance, and Factoring9.11 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.10 Inventory Loans, Accounts Receivable Finance, and FactoringInventory financeMost common form is ‘floor plan finance’Particularly designed for the needs of motor vehicle dealers to finance their inventory of vehiclesDealer is expected to promote financier’s financial productsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.)Accounts receivable financeA loan to a business secured against its accounts receivable (debtors)Mainly supplied by finance companiesLending company takes charge over a company’s accounts receivable; however, the borrowing company is still responsible for the debtor book and bad debtsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.)FactoringCompany sells its accounts receivable to a factoring company and in doing so Converts a future cash flow (receivables) into a current cash flowFactoring provides immediate cash to the vendor; plus, it removes administration costs of accounts receivableCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.)Factoring (cont.)Main providers of factor finance are the finance companiesFactor is responsible for collection of receivablesNotification basis: vendor is required to notify its (accounts receivables) customers that payment is to be made to the factorCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.10 Inventory Loans, Accounts Receivable Finance, and Factoring (cont.)Factoring (cont.)Recourse arrangement: factor has a claim against the vendor if a receivable is not paidNon-recourse arrangement: factor has no claim against vendor companyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation (cont.)9.8 Negotiable Certificates of Deposit9.9 Investment Bank Cash Advance Facility9.10 Inventory Loans, Accounts Receivable Finance, and Factoring9.11 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.11 SummaryShort-term debt is appropriate for funding short-term assets (matching principle)Trade credit—simple and commonIntercompany loans—short-term, high credit rating requiredBank overdraft—commonDiscount securitiesBill financing—important source of fundsPromissory-notes (P-notes)—good credit ratingCertificates of deposit (CDs)—issued by banksCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson9.11 Summary (cont.)Investment bank cash advance facility—for larger corporationsInventory loans, accounts receivable finance and factoring—alternative sources of finance for smaller and medium-sized businesses (SMEs)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson