FIN2101 Business finance Ii
FIN2101 Business Finance II
Module o Sources of finance
Module 6 Sources of Finance
Student activities Reading Text, Chapters 2(pp 33-41),15(pp. 553-71)&18(Pp 661-6 Text Study Guide, Chapters 2, 15&18(parts only Study book, Module 6 Tutorial Activities a Tutorial workbook, Self Assessment Activity 6.1
Student Activities Reading ◼ Text, Chapters 2 (pp. 33-41), 15 (pp. 553-71) & 18 (pp. 661-6) ◼ Text Study Guide, Chapters 2, 15 & 18 (parts only) ◼ Study Book, Module 6 Tutorial Activities ◼ Tutorial Workbook, Self Assessment Activity 6.1
Sources of finance Internal Equity Retained Earnings Dividend reinvestment plans) a External Equity(Ordinary and Preference Share Issues, Rights Issues) Debt long-and Short-term Convertible securities
Sources of Finance ◼ Internal Equity (Retained Earnings, Dividend Reinvestment Plans). ◼ External Equity (Ordinary and Preference Share Issues, Rights Issues). ◼ Debt (Long- and Short-term). ◼ Convertible Securities
Short-term debt ■ Cash borrowings ■ Bills of exchange ■ Trade credit ■ Promissory notes ■ Short- term loans ■ Factoring ■ Bank overdraft ■ Certificates of deposit(CDs)
Short-term Debt ◼ Cash borrowings ◼ Trade credit ◼ Short-term loans ◼ Bank overdraft ◼ Bills of exchange ◼ Promissory notes ◼ Factoring ◼ Certificates of deposit (CDs)
Choosing short-term Debt Factors to consider the effective cost; the availability in the amount needed and for the period when financing is required; the influence of the use of a particular source on the cost and availability of other sources
Choosing Short-term Debt Factors to consider: ◼ the effective cost; ◼ the availability in the amount needed and for the period when financing is required; ◼ the influence of the use of a particular source on the cost and availability of other sources
Cash borrowings Market restricted to firms of high credit worthiness ■ Rarely secured. a Typically overnight(1lam money) or for days(24-hour loans)(rarely for more than 3 months)
Cash Borrowings ◼ Market restricted to firms of high credit worthiness. ◼ Rarely secured. ◼ Typically overnight (11am money) or for 7 days (24-hour loans) (rarely for more than 3 months)
Trade Credit/Accounts Payable Readily available and more or less free Effective management is important Cost of not taking discounts Stretching'' accounts payable ■ Text pp.554-7
Trade Credit/Accounts Payable ◼ Readily available and more or less free. ◼ Effective management is important. ◼ Cost of not taking discounts. ◼ “Stretching” accounts payable. ◼ Text pp. 554-7
Cost of foregoing discount CD 365 Cost 100%-CDN where CD= the cash discount n=the number of days payment can be delayed by not taking the discount
Cost of Foregoing Discount the discount can be delayed by not taking N the number of days payment where C D the cash discount N 365 100% -C D C D Cost = = =
Cost of foregoing discount a XYZ Ltd sells goods for $1 000 to ABC Ltd on the following terms: 2/10, n/30 a What is the cost to ABC ltd of foregoing the discount offered?
Cost of Foregoing Discount ◼ XYZ Ltd sells goods for $1 000 to ABC Ltd on the following terms: 2/10, n/30. ◼ What is the cost to ABC Ltd of foregoing the discount offered?