Current Liabilities ManagementSpontaneous LiabilitiesSpontaneous Liabilities: Accounts Payable ManagementSpontaneous Liabilities: Accounts Payable Management (cont.)Spontaneous Liabilities: Analyzing Credit TermsSpontaneous Liabilities: Analyzing Credit Terms (cont.)Slide 7Slide 8Slide 9Slide 10Slide 11Spontaneous Liabilities: Effects of Stretching Accounts PayableSpontaneous Liabilities: AccrualsUnsecured Sources of Short-Term Loans: Bank LoansUnsecured Sources of Short-Term Loans: Bank Loans (cont.)Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Unsecured Sources of Short-Term Loans: Commercial PaperUnsecured Sources of Short-Term Loans: International LoansSecured Sources of Short-Term Loans: CharacteristicsSecured Sources of Short-Term Loans: Characteristics (cont.)Secured Sources of Short-Term LoansSecured Sources of Short-Term Loans (cont.)Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Current Liabilities ManagementPrepared by Keldon BauerSpontaneous LiabilitiesSpontaneous liabilities arise from the normal course of business.The two major spontaneous liability sources are accounts payable and accruals.As a firm’s sales increase, accounts payable and accruals increase in response to the increased purchases, wages, and taxes.There is normally no explicit cost attached to either of these current liabilities.Spontaneous Liabilities: Accounts Payable ManagementAccounts payable are the major source of unsecured short-term financing for business firms.The average payment period has two parts:The time from the purchase of raw materials until the firm mails the paymentPayment float time (the time it takes after the firm mails its payment until the supplier has withdrawn spendable funds from the firm’s accountThe firm’s goal is to pay as slowly as possible without damaging its credit rating.Spontaneous Liabilities: Accounts Payable Management (cont.)Spontaneous Liabilities: Analyzing Credit TermsCredit terms offered by suppliers allow a firm to delay payment for its purchases.However, the supplier probably imputes the cost of offering terms in its selling price.Therefore, the firm should analyze credit terms to determine its best credit strategy.If a cash discount is offered, the firm has two options—to take the cash discount or to give it up.Taking the Cash DiscountIf a firm intends to take a cash discount, it should pay on the last day of the discount period.There is no cost associated with taking a cash discount.Spontaneous Liabilities: Analyzing Credit Terms (cont.)Giving Up the Cash DiscountIf a firm chooses to give up the cash discount, it should pay on the final day of the credit period.The cost of giving up a cash discount is the implied rate of interest paid to delay payment of an account payable for an additional number of days.Spontaneous Liabilities: Analyzing Credit Terms (cont.)Giving Up the Cash DiscountSpontaneous Liabilities: Analyzing Credit Terms (cont.)Giving Up the Cash DiscountSpontaneous Liabilities: Analyzing Credit Terms (cont.)PeriodDiscount - PeriodCredit 365Discount % - 100%Discount % Cost %24.3710303652% - 100%2% Cost Giving Up the Cash DiscountSpontaneous Liabilities: Analyzing Credit Terms (cont.)The preceding example suggest that the firm should take the cash discount as long as it can borrow from other sources for less than 37.24%. Because nearly all firms can borrow for less than this (even using credit cards!) they should always take the terms 2/10 net 30.Using the Cost of Giving Up the Cash DiscountSpontaneous Liabilities: Analyzing Credit Terms (cont.)Spontaneous Liabilities: Effects of Stretching Accounts PayableStretching accounts payable simply involves paying bills as late as possible without damaging credit rating.This can reduce the cost of giving up the discount.Spontaneous Liabilities: AccrualsAccruals are liabilities for services received for which payment has yet to be made. The most common items accrued by a firm are wages and taxes.While payments to the government cannot be manipulated, payments to employees can.This is accomplished by delaying payment of wages, or stretching the payment of wages for as long as possible.Unsecured Sources of Short-Term Loans: Bank LoansThe major type of loan made by banks to businesses is the short-term, self-liquidating loan which are intended to carry firms through seasonal peaks in financing needs.These loans are generally obtained as companies build up inventory and experience growth in accounts receivable.As receivables and inventories are converted into cash, the loans are then retired.These loans come in three basic forms: single-payment notes, lines of credit, and revolving credit agreements.Unsecured Sources of Short-Term Loans: Bank Loans (cont.)Loan Interest RatesMost banks loans are based on the prime rate of interest which is the lowest rate of interest charged by the nation’s leading banks on loans to their most reliable business borrowers.Banks generally determine the rate to be charged to various borrowers by adding a premium to the prime rate to adjust it for the borrowers “riskiness.”Unsecured Sources of Short-Term Loans: Bank Loans (cont.)Fixed & Floating-Rate LoansOn a fixed-rate loan, the rate of interest is determined at a set increment above the prime rate and remains at that rate until maturity.On a floating-rate loan, the increment above the prime rate is initially established and is then allowed to float with prime until maturity.Like ARMs, the increment above prime is generally lower on floating rate loans than on fixed-rate loans.Unsecured Sources of Short-Term Loans: Bank Loans (cont.)Method of Computing InterestOnce the nominal (stated) rate of interest is established, the method of computing interest is determined.Interest can be paid either when a loan matures or in advance.If interest is paid at maturity, the effective (true) rate of interest—assuming the loan is outstanding for exactly one year—may be computed as follows:BorrowedAmount ExpenseInterest Annual Interest Effective Unsecured Sources of Short-Term Loans: Bank Loans (cont.)Method of Computing InterestIf the interest is paid in advance, it is deducted from the loan so that the borrower actually receives less money than requested.Loans of this type are called discount loans. The effective rate of interest on a