32.1: Sources of Capital

Question 1

(Net) Working capital = …

Answer 1

(Net) Working capital = Current assets – Current liabilities

Question 2

The main types of short-term bank financing include:

Answer 2

Uncommitted bank lines of credit;

Committed bank lines of credit;

Revolving credit agreements (revolvers).

Question 3

What are the Uncommitted bank lines of credit?

Answer 3

The least reliable form of bank borrowing in which a bank offers, without formal commitment.

Question 4

What are the Committed bank lines of credit?

Answer 4

A bank commitment to extend credit; the commitment is considered a short-term liability and is usually in effect for 364 days (one day short of a full year).

Question 5

What are the Revolving credit agreements (revolvers)?

Answer 5

The most reliable form of short-term bank borrowing facilities; they are in effect for multiple years (e.g., three to five years) and can have optional medium-term loan features.

Question 6

What is factoring in terms of loans?

Answer 6

A type of financing in which businesses sell their accounts receivable, unpaid customer invoices or projected future cash flow for a quick injection of cash right away.

Question 7

In terms of loans and factoring, what are the 3 main types of them?

Answer 7

Secured (“asset-based”) loans;

Assignment of accounts receivable;

Factoring arrangement.

Question 8

What are the 3 approaches that companies take towards working capital management?

Answer 8

Aggressive;

Conservative;

Moderate.

Question 9

What does conservative approach to working capital management imply?

Answer 9

In a conservative approach the firm holds a larger position in cash, receivables, and inventories, relative to sales.

Question 10

What does an aggresive approach to working capital management imply?

Answer 10

In an aggressive approach the firm has substantially less committed to current assets, thereby reducing the company’s short-term financial flexibility in exchange for higher equity returns.

Question 11

What does a moderate approach to working capital management imply?

Answer 11

In a moderate approach the firm holds a position somewhere between the two approaches.

Question 12

Liquidity and Short-Term Funding
sources include?

Answer 12

Primary sources - day-to-day operations (e.g., cash balances, trade credit, lines of credit from bank).

Secondary sources - e.g., liquidating assets, filing for bankruptcy, negotiating debt agreements.

Question 13

Drags on liquidity … cash inflow

Answer 13

Drags on liquidity delay cash inflow.

Question 14

Pulls on liquidity … cash outflows

Answer 14

Pulls on liquidity accelerate cash outflows.