week 8 - Short Term Financing

Operating cycle

Inventory + accounts receivable

If firm can reduce annual increase in working capital by xx% what would be the effect on value

Use formula for growing perpetuity (FCF)/r-g

pros and cons trade credit to customers (buyers)

• It improves the cash flow for buyers because payment is not due till later. Certain buyers may be able to negotiate longer trade credit repayment terms, which provides an even greater advantage.

• high costs (in the form of late-payment penalty charges or negative impact on business credit profile) if payments are not made on time.

Pros and cons of trade credit to suppliers (sellers):

encouraging customer loyalty and repeat business. Trade credit can also lead to higher sales volumes as buyers are likely to purchase more when there is no cost associated with the financing.

Delayed revenue.

Cost of trade credit 4/10, net 30

100*discount = (what is lost to the seller)

First ten days are interest free otherwise incur xx interset after x amount of days

100 - what is lost = discounted payment

What is lost/discounted payment per xx days (full payable days - discounted days) = a

EAR = (1+ a)^365/days -1 = cost of trade credit

if cost of trade credit < bank interest → pay late.
If cost of trade credit > bank interest → borrow and pay early.

Should you offer trade credit?

Npv of each option - using perpetuity formula

Find the difference