BBPW3203

FINANCIAL MANAGEMENT II
By : DANIZAH BINTI CHE DIN
H/P : 012-4278091
E-Mail : danizah@yahoo.com

CLASS :
TUTORIAL 1
12/1/2013
TUTORIAL 2
23/2/2013
TUTORIAL 3 9/3/2013
TUTORIAL
ASSESSMENT :4
ASSIGNMENT [40%] 10 MARCH 2013
FINAL EXAM [60%]
23/3/2013
FINAL EXAM [60%]
 CHAPTER 1
SHORT TERM FINANCING
LEARNING OUTCOMES :
By the end of this tutorial, you should be able to :

Differentiate between accounting and finance.

Explain the importance of financial management.

Identify the objective of a firm.

Discuss the roles of financial manager in a firm.

Elaborate the characteristics, the advantages, & the

weaknesses of each type of business.

Discuss the challenges of financial management in

the future.
 FINANCING
Short-term Financing
Refer to a finance that must be paid within a year.
Current assets policy.
A tool to finance the account receivable and to building up the
inventory.

Intermediate Financing
Similar to short-term but able to fulfill requirement for
permanent funding.
Self-liquiditing.

Long-term Financing
Debt more than a year.
To finance a fixed assets.
The repayment is arrange and schedule.
 CURRENT ASSET
FINANCIAL POLICY ?
1. Temporary Current Assets
The cycle of current assets value is affected by the
economy growth.
Seasonal fluctuation.

2. Permanent Current Assets

The current assets is maintained all the time even though
the economic is slack.
 FINANCING STRATEGY
Conservative Approach
RM Marketable Securities / Excess Liquidity
Zero Short-term Financing

Temporary Current Assets

Permanent Current Assets
Long-term Financing

Fixed Assets

TIME PERIOD
Used some of the long term financing such as bond to
finance some of the temporary current assets.
Received the least risk & the lowest expected return.
 Maturity Matching /
Moderate
Excess Approach
Short-Term
Liquidity Financing
RM
Temporary Current Assets

Permanent Current Assets

Long-Term
Financing
Fixed Assets

Time Period

Used short-term financing to finance the temporary current assets & used
long-term finance to finance the permanent current assets & fixed assets.
Minimize risk & maximize the expected return.
 Aggressive Approach
Short-Term Financing

RM
Temporary Current Assets

Permanent Current Assets

Long-Term
Financing
Fixed Assets

TIME PERIOD

Used some of the temporary capital to finance part of

the permanent assets.
Promised the highest return but greater risk.
 WHY FIRM NEED
SHORT-TERM FINANCING ?
Cash flow from operations may not be sufficient to keep up
with growth-related financing needs.

Firms may prefer to borrow now for their inventory or other

short term asset needs rather than wait until they have saved
enough.

Firms prefer short-term financing instead of long-term sources

of financing due to:
easier availability
usually has lower cost (remember yield curve)
matches need for short term assets, like inventory
 ADV. vs DIS. of
SHORT-TERM
ADVANTAGES
FINANCING DISADVANTAGES :
Lower cost. More riskier than long-
term.
Easy to get fund with
low transactions Rates increased.
cost.

No penalty
repayment.
 MAIN SOURCES OF
SHORT-TERM FINANCING
1. SPONTANEOUS FINANCING
Referring to normal and daily operations which do not require
any collateral such as Accruals & Account Payable or Trade
Credits.

2. NON-SPONTANEOUS FINANCING
Not a normal or daily operations that needs collateral such as
bank loan and commercial paper.

3. ALTERNATIVE SOURCES OF FINANCING

Factoring, account receivable financing, inventory financing
and others.
 Is there a cost to accruals?
Do firms have much control over
amount of accruals?
Accruals are free in the sense that no explicit
interest is charged.

However, firms have little control over accrual

levels, which are influenced more by industry
custom, economic factors, and tax laws than by
managerial actions.
WHAT IS TRADE CREDIT?
Trade credit is credit furnished by a firms
suppliers when delaying a payment.

Trade credit is often the largest source of short-

term credit for small firms.

Trade credit is spontaneous and relatively easy

to get, but the cost can be high.
 TRADE CREDIT
NET PRICE WITHOUT CASH DISCOUNT
Credit terms of payment 15/EOM.

Payment needs to be made within 15 days and the latest in the

end of the month.

NET PRICE WITH CASH DISCOUNT

Credit terms of payment 2/10, net 30.

Payment need to be paid within 10 days to enjoy 2% discount and

payment made on day 11th onwards, no discount will be given.

Latest payment should be made were within 30 days.

 TRADE CREDIT
GIVING THE CASH DISCOUNT & TAKING EXTENDED CREDIT
Payment made on the last date of discount period.

To obtain Effective Annual cost Rate of trade credits :

 EXAMPLE 1
B&B buys RM3,030,303 gross, or RM3,000,000 net, on terms of
1/10, net 30. However, the firm pays on Day 30.

Giving up the cash discount paid Day 30.

Annual Financing Cost (AFC) = X / 100 X x 360 / Z Y

= (1/100 1) x (360/30 10)
= xxx

Effective Annual cost Rate (EAR) =1 r / m m 1

= 1 0.1212 / 360 360 1
= zzz%
 COMMERCIAL PAPER
Short term notes issued by large, strong companies.

Trades in the market at rates just above the T-bill

rate.

Bought by banks and other companies, then held as

marketable securities for liquidity purposes.
 BANK LOAN
Most firms used bank loans as a major source of finance after trade credit.

The firm can borrow up to the limit set by a bank after reviewing the firm
cash budget.

A written agreement.

Two basic categories of loan :

Secured loan collateral.
Unsecured loan
Promissory notes.
Compensating balance
Revolving credit agreement
Line of credit.
 UNSECURED LOAN
Compensating Balance
Bank require borrower to maintain an average demand deposit
balance which equal to 10 to 20 percent of the loan face value.

EXAMPLE 2
Bank requires a compensating balance of 20% of the loan face
value. The bank short-term loan taken was RM 10,000 and will
be mature in 12 months. If bank interest charge is 10%, what
should be the AFC?

Amount borrowed = RM 10,000

Compensating Balance = RM 10,000 x 20% = RM 2,000
Fund Available for used (PV) = RM 10,000 RM 2,000 = RM 8,000
Interest (r) = RM 10,000 x 10% = RM 1,000
Amount to be repaid (FV) = RM 8,000 + RM 1,000 = RM 9,000
ANSWER EXAMPLE 2
Amount borrowed = RM 10,000
Compensating Balance = RM 10,000 x 20% = RM 2,000
Fund Available for used (PV) = RM 10,000 RM 2,000 = RM 8,000
Interest (r) = RM 10,000 x 10% = RM 1,000
Amount to be repaid (FV) = RM 8,000 + RM 1,000 = RM 9,000

AFC = r/PV = RM 1,000/RM 8,000 = 12.5%

 UNSECURED LOAN
Revolving Credit Agreemen
 UNSECURED LOAN
Line of Credit
Borrowing limit set by bank.

EXAMPLE 3

Amount borrowed (PV) = RM 200,000

Interest (Jan March) (i1) = RM 200,000 x (0.06+0.01) x (90/360) = RM 3,452.05
Interest (Apr - Dec) (i2) = RM 200,000 x (0.065+0.01) x (275/365)= RM 11,301.37

Total Interest (r) = i1 + i2 = RM 3,452.05 + RM 11,301.37 = RM 14,753.42

AFC = i / PV = RM 14,753.42/RM 200,000 = 7.377%

 TYPE OF INTEREST
1. Regular & Simple interest based on interest-only loan.

2. Discount interest interest is deducted in advance.

METHOD OF
INTEREST REPAYMENT
1. Interest only
Only interest is paid during life of loan. Principle paid when loan is
matured.

2. Amortized
Both principal & interest paid in each period on equal basis.
EXAMPLE 4
A bank is willing to lend B&B RM100,000 for 1 year
at an 8 percent nominal rate. What is the EAR
under the following four loans?
1. Simple annual interest, 1 year.
2. Simple interest, paid monthly.
3. Discount interest.
4. Discount interest with 10 percent compensating balance.

Amount borrowed (PV) = RM 100,000

Nominal rate (r) = 8%
Interest rate (i) = RM 100,000 x 8% = RM 8,000
 Simple annual interest, 1 year.
AFC= i / PV = RM 8,000 / RM 100,000 = 8%

Simple interest, paid monthly.

12
EAR = [1+(0.08/12)] -1
= 8.3%

Discount interest.
Amount borrowed = RM 100,000
Nominal rate (r) = 8%
Interest rate (i) = RM 100,000 x 8% = RM 8,000
Useable fund (PV) = RM 100,000 RM 8,000 = RM 92,000
Amount needed (FV) = RM 100,000

AFC = [FV / PV] 1 = [RM 100,000 / RM 92,000]-1 =

8.7%
 Discount interest with 10% compensating
balance.
Amount borrowed = RM 100,000 / (1-0.08-0.01) = RM 121,951.22

Compensating Balance = RM 121,951.22 x 10% = RM 12,195.12

Interest rate (i) = RM 121,951.22 x 8% = RM 9,756.10

Useable fund (PV) = RM 121,951.22 RM 12,195.12 RM 9,756.10

= RM 100,000

Amount needed (FV) = RM 100, 000 + RM 9,756.10 = RM 109,756.10

AFC = [FV / PV] 1 = [RM 109,756.10 / RM 100,000]-1 =

9.76%