Introduction to Finance

(LO 16.4)
What are the primary reasons for using trade credit for 
short-term fi nancing?
 15. 
(LO 16.4)
Under what circumstances would a business secure 
its fi nancing through a commercial fi nance company?
 16. 
(LO 16.4)
What is commercial paper, and how important is it as 
a source of fi nancing?
 17. 
(LO 16.4)
Is commercial paper a reliable source of fi nancing? 
Why or why not?
 18. 
(LO 16.5)
When might a business seek accounts receivable 
fi nancing?
 19. 
(LO 16.5)
What safeguards may a bank establish to protect itself 
when it lends on the basis of a customer’s receivables pledged as 
collateral for a loan?
 20. 
(LO 16.5)
Describe how a factor diff ers from a commercial fi nance 
company in terms of accounts receivable fi nancing.
 21. 
(LO 16.5)
Why would a business use a factor’s services?
 22. 
(LO 16.6)
When a business fi rm uses its inventory as collateral for 
a bank loan, how is the problem of storing and guarding the inventory 
handled for the bank?
Problems
1. 
A supplier is off ering your fi rm a cash discount of 2 percent if 
purchases are paid for within ten days; otherwise, the bill is due at the 
end of 60 days. Would you recommend borrowing from a bank at an 
18 percent annual interest rate to take advantage of the cash discount 
off er? Explain your answer.
2. 
Assume you have been off ered cash discounts on merchandise that 
can be purchased from either of two suppliers. Supplier A off ers trade 
credit terms of 3/20, net 70, and supplier B off ers 4/15, net 80. What 
is the approximate eff ective cost of missing the cash discounts from 
each supplier? If you could not take advantage of either cash discount 
off er, which supplier would you select?
3. 
Obtain a current issue of the Federal Reserve Bulletin, or review 
a copy from the Fed website (http://www.federalreserve.gov) or the 
St. Louis Fed website (http://www.stlouisfed.org), and determine the 
changes in the prime rate that have occurred since the end of 2000. 
Comment on any trends in the data.