NaimExplain

What are some of the major sources of short-term financing, and how are interest rates on these loans quoted? Answer: A major source of short-term financing is bank loans. Often, firms pay a regular fee for a LINE OF CREDIT that allows them to borrow from the bank up to an agreed amount. The interest rate on short-term bank loans is usually quoted as a simple interest rate (or APR). Sometimes the interest rate is quoted as a discount, so that the interest is deducted up front. Two other important sources of short-term financing.

Why do firms need to invest in net working capital? Answer: - Short-term financial planning is concerned with the management of the firm's short-term, or current, assets and liabilities. The most important current assets are cash, marketable securities, inventory, and trade receivables. The most important current liabilities are bank loans and trade payables. - The difference between current assets and current liabilities is called NET WORKING CAPITAL (NWC). NWC arises from lags between the time the firm obtains the raw materials for its product and the time it finally collects its bills from customers. The OPERATING CYCLE is the length of time from the purchase of raw materials to the collection of cash from customers. - The cash CONVERSION CYCLE is the length of time between the firm's payment for materials and the date that it gets paid by its customers. THE CASH CONVERSION CYCLE is partly within management's control. For example, it can choose to have a higher ...

How does long-term financing policy affect short-term financing requirements? Answer: The nature of the firm's short-term financial planning problem is determined by the amount of long-term capital it raises. A firm that issues large amounts of long-term debt or common stock, or that retains a large part of its earnings, may find that it has permanent excess cash. Other firms raise relatively little long-term capital and end up as permanent short-term debtors. Most firms attempt to find a happy balance by financing all long-term assets and part of current assets with equity and long-term debt. Such firms may invest cash surpluses during part of the year and borrow during the rest of the year.