Secrets To Building Business Credit
There is little doubt that technological and financial innovations over the past three decades have had a profound effect on the banking industry. There is no shortage of examples of this phenomenon. ATM machines and the shift to an electronic payments system, for example, have profoundly affected the way in which banking services are delivered. Innovation in back-office technology was an important factor driving the securitization of the residential mortgage market.4 Many researchers have also argued that technological innovation has had an equally powerful effect on small business loan underwriting essentially arguing that technological innovation has reduced the absolute and relative cost of transactions-based lending vis-a-vis relationship lending leading to increased credit availability and substitution effects.5 That is, innovation could lead to an increase in credit availability to formerly rationed small businesses for whom information production becomes The innovation in...
Comprehend the role played by investment banks in raising capital. 5. Analyze trends in raising capital. Chapter 1 Raising Capital 3 To be a player in modern business requires a sophisticated understanding of the new, yet ever-changing institutional framework in which financing takes place. As a beginning, this chapter describes the workings of the capital markets and the general decisions that firms face when they raise funds. Specifically, this chapter focuses on the classes of securities that firms issue, the role played by investment banks in raising capital, the environment in which capital is raised, and the differences between the U.S. financial systems and the financial systems in other countries. It concludes with a discussion of current trends in the raising of capital.
(a) Features of business loans Business loans have two key characteristics they are based on interest rates and take into account the overall risk to the company. They are business loans because they are not granted for a specific purpose (investments, trade payables, inventories, etc.). There is no connection between the funds advanced and the company's disbursements. They can even be used to finance an investment already made. Business loans are based on interest rates - in other words, cost, and the cheapest usually wins. They rarely come with ancillary services such as debt recovery, and are determined according to the maturity schedule and margin on the market rate
Long-term debt for firms can take one of two forms. It can be a long-term loan from a bank or other financial institution or it can be a long-term bond issued to financial markets, in which case the creditors are the investors in the bond. Accountants measure the value of long term debt by looking at the present value of payments due on the loan or bond at the time of the borrowing. For bank loans, this will be equal to the nominal value of the loan. With bonds, however, there are three possibilities When bonds are issued at par value, for instance, the value of the long-term debt is generally measured in terms of the nominal obligation created, in terms of principal (face value) due on the borrowing. When bonds are issued at a premium or a discount on par value, the bonds are recorded at the issue price, but the premium or discount to the face value is amortized over the life of the bond. As an extreme example, companies that issue zero coupon debt have to record the debt at the...
Financial markets, from an institutional perspective, are covered in three chapters. Chapter 1, a general overview of the process of raising capital, walks the reader through the decision-making process of how to raise funds, from whom, in what form, and with whose help. It also focuses on the legal and institutional environment in which securities are issued and compares the procedure for raising capital in the United States with the procedures used in other major countries, specifically, Germany, Japan, and the United Kingdom.
Hammurabi's legal limit of 20 per annum on loans in silver cannot be usefully compared with today's money-market interest rates. It was well above most twentieth-century rates on prime business loans, savings bonds, savings deposits, and the like, but was below the 30-45 per annum legal limits and actual charges in many states of the United States for small personal loans. It will be very difficult throughout this history to compare rates with like rates. There are more types and varieties of credit contracts in ancient and modern history than are dreamed of in the philosophy of the modern bond salesperson.
Even so, top management has to clarify how these cost-reduction efforts fit with the company's strategy. Cost cutting that occurs without reference to an overall strategy feels like torture to employees. Yes, they are happy to have jobs as their companies, say, downsize. If they do not know where the cost cutting is headed, though, they may consider cost reduction a mere tactic to pile more work on their desks, with top management lacking a real vision for converting spending and costs into business growth.
Maturity categories, long and short, because the bulk of the data is not more precise. Long-term loans will include the perpetual debt of Italian cities, the French rentes, the perpetual annuities issued by many European towns, and other loans that were clearly intended to run for many years. Short-term loans will include bills of exchange, bank deposits, pawnshop and other collateral loans, and the floating debt of princes. Much of this short-term debt, in fact, probably ran for years, but the form of contract was short term. There is uncertainty, however, as to the term of many medieval credits when there is doubt, they have been classified as short term, but a description of the term is given to the reader whenever it has come down to us.
Developing the necessary skills is to become familiar with what the new world looks like, who the players are, and what the choices are. In this vein, this chapter has attempted to broadly describe the securities available for external financing, current trends in financing the firm, the institutional and regulatory environment in which securities are issued, the process of issuing securities, and global differences and recent trends in raising capital. A more detailed discussion of the debt and equity markets will be provided in the following two chapters.
There is also evidence that suggests that the impact of consolidation and the associated shift in the size structure of the banking market on small business lending may be relatively benign. One study found that the likelihood of an SME receiving a line of credit from a small bank is roughly proportionate to the presence of small banks in the local market (Berger et al. 2007). Other studies found that while merged banks tend to reduce their small business lending, other banks in the local market tend to increase their small business lending (Berger et al. 1998, Alessandrini et al. 2008). And, yet another study found that whether a merged bank decreases its small business lending depends on how the acquisition is handled organizationally. If the acquired bank is allowed to keep its charter and operate as a separate subsidiary, small business lending tends not to change after the acquisition. However, the merging of charters tends to be associated with a reduction in small business...
Cash Flow to Creditors Looking at the income statement in Table 2.2, we see that U.S. paid 70 in interest to creditors. From the balance sheets in Table 2.1, we see that long-term debt rose by 454 - 408 46. So, U.S. Corporation paid out 70 in interest, but it borrowed an additional 46. Net cash flow to creditors is thus
An entity's legal nature reflects its organizational form. Selecting the organizational form is one of the most important decisions business owners make. This choice affects the costs of raising capital, operating the business (including taxation issues), and, possibly, litigating. The available organizational form alternatives have increased remarkably in recent years.
A corporate bond's default and liquidity risks are affected by its maturity. For example, the default risk on Coca-Cola's short-term debt is very small, since there is almost no chance that Coca-Cola will go bankrupt over the next few years. However, Coke has some 100-year bonds, and while the odds of Coke defaulting on these bonds still might not be high, the default risk on these bonds is considerably higher than that on its short-term debt. Longer-term corporate bonds are also less liquid than shorter-term debt, hence the liquidity premium rises as maturity lengthens. The primary reason for this is that, for the reasons discussed earlier, short-term debt has less default and interest rate risk, so a buyer can buy short-term debt without having to do as much credit checking as would be necessary for long-term debt. Thus, people can move into and out of short-term corporate debt much more rapidly than long-term debt. The end result is that short-term corporate debt is more liquid,...
Udell (2009 Chapter 2, this volume) provides a discussion of the alternative technologies available to lenders in underwriting and pricing small business credit. That discussion detailed how a lender's choice of lending technology (e.g., relationship versus transactions lending) can affect a lender's ability to extend credit to more distant borrowers. In this chapter, we supplement Udell's analysis by examining the underlying costs that give rise to the need for alternative loan production technologies, focusing on costs borne by lenders and borrowers.
The current ratio, like any ratio, is affected by various types of transactions. For example, suppose the firm borrows over the long term to raise money. The short-run effect would be an increase in cash from the issue proceeds and an increase in long-term debt. Current liabilities would not be affected, so the current ratio would rise.
7Kallberg and Udell (2003) discuss the small business credit information collected by Dun and Bradstreet. They find that the information contained in these models provides significant additional predictive power above that provided by the other credit information available to lenders.
A Brief Digression Total Capitalization versus Total Assets Frequently, financial analysts are more concerned with the firm's long-term debt than its short-term debt, because the short-term debt will constantly be changing. Also, a firm's accounts payable may be more of a reflection of trade practice than debt management policy. For these reasons, the long-term debt ratio is often calculated as Long-term debt ratio Long-term debt Long-term debt + Total equity The 3,048 in total long-term debt and equity is sometimes called the firm's total capitalization, and the financial manager will frequently focus on this quantity rather than on total assets. To complicate matters, different people (and different books) mean different things by the term debt ratio. Some mean a ratio of total debt, and some mean a ratio of long-term debt only, and, unfortunately, a substantial number are simply vague about which one they mean. This is a source of confusion, so we choose to give two separate names...
A second use of credit scoring that may have reduced transaction costs involves loan origination and possibly loan pricing. As discussed earlier, the assembling of data on past credit experience by individuals by credit bureaus has served to provide hard information about the quality of individual applicants. This information can be used in credit scoring models to evaluate an individual's creditworthiness at very low marginal costs. While the information in credit bureaux is primarily related to individual (and not business) credit histories, it has also proven useful in commercial lending. Cowan and Cowan (2006), for example, report that 80 percent of lenders that use credit scoring in underwriting small business loans rely exclusively on the personal credit score of the owner of the small business, Only 2.6 percent use only a credit score calculated for the business, with the remaining lenders using a combination. These scores and the information upon which they are based may...
Several other articles model the costs and benefits of the debt contract. The benefit is usually the reduction in the agency cost, such as preventing the manager from investing in negative net present value projects, or forcing him to sell assets that are worth more in alternative use.The main costs of debt are that firms may be prevented from undertaking good projects because debt covenants keep them from raising additional funds, or else they may be forced by creditors to liquidate when it is not efficient to do so. Stulz (1990), Diamond (1991), Harris and Raviv (1990), and Hart and Moore (1995) present some of the main models incorporating these ideas, whereas Lang, Ofek, and Stulz (1996) present evidence indicating that leverage indeed curtails investment by firms with poor prospects. Williamson (1988) and Shleifer and Vishny (1992) argue that liquidations might be particularly costly when alternative use of the asset is limited or when the potential buyers of the asset cannot...
Financial markets are forums in which suppliers of funds and demanders of funds can transact business directly. Whereas the loans and investments of institutions are made without the direct knowledge of the suppliers of funds (savers), suppliers in the financial markets know where their funds are being lent or invested. The two key financial markets are the money market and the capital market. Transactions in short-term debt instruments, or marketable securities, take place in the money market. Long-term securities bonds and stocks are traded in the capital market.
Decide whether to borrow by issuing long- or short-term debt and to investors who must decide whether to buy long- or short-term bonds. Thus, it is important to understand (1) how long- and short-term rates relate to each other and (2) what causes shifts in their relative positions.
Mimeo Board of Governors of the Federal Reserve System Berger AN, Frame WS (2006) Small business credit scoring and credit availability. Journal of small business credit. Journal of Money, Credit, and Banking 37 191-222 Berger AN, Kashyap AK, Scalise JM (1995) The transformation of the US banking industry What constraints. Review of Finance (forthcoming) Carter D, McNulty J, Verbrugge J (2004) Do small banks have an advantage in lending An examination of risk-adjusted yields on business loans at large and small banks. Journal of Financial Services Research 25 233-252 Cerqueiro G, Degryse H, Ongena S (2007) Rules versus discretion in loan rate setting. Tilburg
We do not think that these debates have been conclusive. True, American takeovers are a crude governance mechanism. But the U.S. economy has produced mechanisms of this kind repeatedly during the 20th century, including mergers, proxy fights, LBOs, and more recently vulture funds. Although many of these mechanisms run into political trouble, new ones keep being invented. The end of 1980s hostile takeovers probably does not spell the end of active large investors. Moreover, partly as a result of takeovers, the American economy in the 1980s went through a more radical, and possibly effective, restructuring than the economies of Japan and Western Europe. Finally, because of extensive legal protection of small investors, young American firms are able to raise capital in the stock market better than firms elsewhere in the world. It is difficult to dismiss the U.S. corporate governance system in light of these basic facts.
When governments or companies borrow money, they often do so by issuing bonds. A bond is simply a long-term debt. If you own a bond, you receive a fixed set of cash payoffs Each year until the bond matures, you collect an interest payment then at maturity, you also get back the face value of the bond. The face value of the bond is known as the principal. Therefore, when the bond matures, the government pays you principal and interest.
Foreign firms also raise capital in the United States. Because the United States has one of the world's largest capital markets, it is natural for many foreign firms to list their equities there. A firm must meet certain requirements, however, to be listed on a U.S. exchange. For example, U.S. financial disclosure requirements are among the strictest in the world, and many foreign firms face significant costs in producing U.S.-style financial statements. American Depository Receipts (ADRs) provide a way to get around these listing problems. With an ADR, a foreign firm deposits a number of its own shares with a money-center bank in New York. The bank then issues an ADR, which is a security that has a legal claim on the cash flows from the deposited shares. In other words, the bank holding the shares receives the stock's dividends, which it pays to the holder of the ADR after deducting a small fee. At the end of 1999, close to 400 firms were listed on the U.S. exchanges, either directly...
There are several reasons why most financial markets are global. First, investors are able to spread risks by diversification into global markets to increase portfolio returns. A bigger pool of funds should mean borrowers are able to raise capital at lower costs. With an increased number of players, competition is increased. Funds can be transferred from capital-rich to capital-deficient countries. Hence, global markets bring about a more efficient distribution of capital at the lowest possible price.
A debt that is not due in the coming year is classified as a long-term liability. A loan that the firm will pay off in five years is one such long-term debt. Firms borrow over the long term from a variety of sources. We will tend to use the terms bonds and bondholders generically to refer to long-term debt and long-term creditors, respectively.
The cost of capital for a firm is defined in terms of the weighted average of its costs of equity and debt, and reflects the company's marginal costs of raising capital (Damodaran 2001). A firm's cost of capital changes if the risk level of its business changes. As risk increases or decreases, so too does the cost of capital. A firm with a lower cost of capital
Director of Countrymetrics, Clark is the authority on sovereign credit risk. His presentation provided a fascinating look at how sovereign risk could be more analogous to corporate credit risk than we might first assume. Despite having rushed up from Paris that morning, Clark was unruffled and quickly had the audience engrossed. Of particular note was his analysis of sovereign debt and ratings migrations, new modelling techniques and new techniques for parameter estimation.
What does all this mean for mergers and acquisitions As the global economy improves, so do companies' product sales therefore, more revenue is realized. More revenue generally means more profits and that means more cash to use to look for business growth opportunities. And as we discussed earlier, growth these days often occurs through mergers or acquisitions.
Current liabilities Current maturities of long-term debt Total current liabilities Long-term debt (Note D) Deferred income taxes (Note C) Other liabilities rD, the cost of Courier's borrowing. In theory rD ought to be the marginal cost of debt the borrowing rate of the company for additional debt. However, this rate is usually difficult to derive. A plausible alternative is use information about the current borrowing rate of the company. In Figure 6.2 you can see what the company reports about its long term debt. You can see that the debt has been borrowed at various interest rates. We use the borrowing rate of 7.13 (the rate applicable to most of the debt) as the company's cost of debt rD .
Although preferred shares are sometimes perceived as a ''debt'' of the company without a due date, they are not actually a debt of the company, but rather are part of equity. Because the preferred dividend is not an obligation of the company, unlike the interest paid on long-term debt, these securities are considered to have a higher risk than long-term debt. Because of this higher risk, the dividend yield on preferred stock will usually be higher than the interest rate that the company pays on long-term debt.
Cash Flow to Creditors The December 31, 2001, balance sheet of Serena's Tennis Shop, Inc., showed long-term debt of 3.1 million, and the December 31, 2002, balance sheet showed long-term debt of 3.6 million. The 2002 income statement showed an interest expense of 400,000. What was the firm's cash flow to creditors during 2002
Without such an analysis it is difficult, if not impossible, to determine what is driving the changes in distance observed in this and other papers, or to speculate about the potential for these changes to continue. While some studies have attempted to test the extent to which small business credit scoring has contributed to greater distances between small businesses and their lenders, they have been unable to isolate the treatment effect of credit scoring. Consequently, it is not possible to draw inferences about the likely effects of a continued expansion of credit scoring.
Net fixed assets 9,504 9,936 Long-term debt 5,184 6,048 d. During 2008, Cabo Wabo raised 1,300 in new long-term debt. How much long-term debt must Cabo Wabo have paid off during the year What is the cash flow to creditors Accounts payable Notes payable Current liabilities Long-term debt Owners' equity Total liabilities and owners' equity
The London Stock Exchange (LSE) provides the bridge between Issuers and the capital markets. The LSE remains by far the largest equity market in Europe. It enables companies (from around the world) to raise capital required for growth, by listing securities on what it claims are highly efficient, transparent and well-regulated markets. Through its two primary markets - the Main Market and AIM - the Exchange provides companies with access
During the year, Metropolitan Manufacturing Company raised 130,000 through additional short-term bank financing. This was added to its previously existing short-term bank debt of 170,000. Notice that Metropolitan added to its short-term debt while also paying off some long-term debt. By its very definition, the long-term amount that was paid off was not due. If it had been due, it would have been classified as ''current portion of long-term debt,'' which is a current liability. There could be several explanations for this financing strategy, but it probably was related to the difference between short-term and long-term interest rates. Metropolitan probably borrowed short-term funds at a lower interest rate and used some of the funds to reduce its long-term loan, which had a higher interest rate.
Ultimately, all long-term debt securities are promises made by the issuing firm to pay principal when due and to make timely interest payments on the unpaid balance. Beyond this, there are a number of features that distinguish these securities from one another. We discuss some of these features next. The maturity of a long-term debt instrument is the length of time the debt remains outstanding with some unpaid balance. Debt securities can be short-term (with maturities of one year or less) or long-term (with maturities of more than one year).1 Short-term debt is sometimes referred to as unfunded debt.2 Debt securities are typically called notes, debentures, or bonds. Strictly speaking, a bond is a secured debt. However, in common usage, the word bond refers to all kinds of secured and unsecured debt. We will therefore continue to use the term generically to refer to long-term debt. The two major forms of long-term debt are public issue and privately placed. We concentrate on...
There is also a practical problem in computing the cost of capital for a bank. If we define debt as any fixed commitment where failure to meet the commitment can lead to loss of equity control, the deposits made by customers at bank branches would qualify and the debt ratio of a bank will very quickly converge on 100 . If we define it more narrowly, we still are faced with a problem of where to draw the line. A pragmatic compromise is to view only long term bonds issued by a bank as debt, but it is an artificial one. Deutsche Bank, for instance, had long-term debt in December 2003 was 82 billion Euros, common equity with a market value of 40.96 billion Euros and preferred stock with a market value of 4.1 billion Euros. Using the cost of equity of 8.76 (from illustration 4.11), the after-tax cost of debt of 3.13 from illustration 4.12 and the cost of preferred stock (6.36 ) from illustration 4.13
Earlier chapters suggest that a rate of 5 became generally accepted in Europe during the sixteenth and seventeenth centuries as a fair and just rate. It was a common rate on long-term census annuities secured by landed property or by state revenues. It also was common for business loans in the form of silent partnerships or deposits.
Metropolitan Manufacturing Company used 50,000 to reduce its long-term debt. The rules of accounting provide strong evidence that this was a voluntary act. Long-term debt by definition is not due within the current year. As mentioned in the discussion of the increase in short-term debt, if this amount had been due, it would have been classified as a current liability, most likely current portion of long-term debt. This payment could have been made because of any combination of the following The interest rates on the long-term debt were high.
Companies face decisions concerning how to raise capital, what projects to invest in, and how to go about paying investors back. Looking at these decisions from their perspective, as shown in Figure 1-4, is called the study of corporate finance (or, sometimes, financial management ).
Based On The Balance Sheets Given For Bethesda Mining Calculate The Following Financial Ratios For Each Year
The Hooya Company has a long-term debt ratio (i.e., the ratio of long-term debt to long-term debt plus equity) of 0.60 and a current ratio of 1.3. Current liabilities are 900, sales are 6,590, profit margin is 9 percent, and ROE is 16 percent. What is the amount of the firm's net fixed assets
In an article published in October 2002, Robert Sheppard, a consultant and attorney based in North Carolina, predicted that the role of trading in the electric power industry would diminish in the coming years. He pointed out that supply demand imbalances and price uncertainty in the 1990s were caused largely by an uncertain and changing regulatory environment, and that the electricity market does not have many of the characteristics of other commodity markets in which users need to hedge, such as the unpredictability of supply or the potentially ruinous consequences for producers or users who do not hedge. The majority of consumers can bear electricity price risk without the benefit of risk-management intermediaries. Sheppard believes that the historical business practices of the electric power industry will reassert themselves as distribution companies once again recognise the benefits of stable, long-term sources of supply, and that project developers will rediscover the advantages...
In addition to long-term debt, Krispy Kreme reports deferred taxes and minority interest. When deferred taxes are reported as a long-term liability, they represent income tax expenses that have not been paid and will not be paid during the coming year. Deferred taxes occur because of timing differences between when corporations recognize revenues and expenses for tax purposes and when those revenues and expenses are recognized for financial reporting purposes. If pretax income on a company's income statement exceeds its taxable income for tax purposes, a portion of the income tax expense a company recognizes will not be paid until some future fiscal period.
Any interest-bearing current liabilities, such as short-term debt and the current maturities of long-term debt, are not subtracted from operating invested capital since the financing cost associated with these liabilities is explicitly excluded from the NOPLAT calculation.
As in Agrawal and Knoeber (1996), we compute Tobin's Q as the ratio of market value of equity plus book value of debt over total assets to measure firm value. The results are simulated using other measures of firm value such as market-to-book, M B, and market-to-sales, M S, ratios (Lins and Servaes, 1999). These variables are, however, ambiguous measures of value-added by pension funds investments, since they can also capture the value of future investment opportunities. As in Yermack (1996), we control for growth opportunities by using P E ratio. In addition, we use various accounting rates of returns and a one year share price return, R-t 1 _ 12 to f to measure performance and market value of equity, ME, or total assets,TA, to control for size. We follow previous literature (e.g., Lang et al., 1996) and use both the market value of leverage, Mlev, defined as long-term debt over market value of equity plus long-term debt, and the book value of leverage, Blev, defined as long-term...
The spectrum of yields available to British investors was always very wide. The low yields from the funds were by no means representative of the entire market. Many kinds of long-term debt instruments were traded in volume on the London Stock Exchange of the nineteenth century. Many new issues of securities were offered by prospectuses to the public. There were loans to United Kingdom municipalities and governmental boards, loans to colonial governments, loans to foreign governments, and loans to domestic and foreign companies. No continuous and uniform series of interest rates on these various types of securities is available to us, and lack of standard ratings and uniformity would make such a series of questionable value. Some examples of debt issues other than the funds will illustrate the level and range of available long-term yields and the differences between other yields and yields on the funds.
Solvency ratios are used to measure a company's ability to meet interest and principal payments on long-term debt and other obligations as they become due. These ratios analyze leverage, debt coverage, and long-term profitability. As mentioned, Solo Practitioner used no interest-bearing debt during the period under review.
Rating on long-term debt and financial ratios Rating on long-term debt and financial ratios Long-term debt capital ( ) Note EBITDA, earnings before interest, taxes, depreciation, and amortization STD, short-term debt. Source From Standard & Poor's Credit Week, July 28, 1999. Used by permission of Standard & Poor's. Note EBITDA, earnings before interest, taxes, depreciation, and amortization STD, short-term debt. Source From Standard & Poor's Credit Week, July 28, 1999. Used by permission of Standard & Poor's. In some ways we're in good shape. We have very little short-term debt and our current assets are three times our current liabilities. But that's not altogether good news because it also suggests that we may have more working capital than we need. I've been
Cash balances 10,000 Inventory of sofas 200,000 Store and property 100,000 Accounts receivable 22,000 Accounts payable 17,000 Long-term debt 170,000 Long-term debt e. If Nobel issued 200 of new long-term debt, how much debt must have been paid off during the year Long-term debt 28. Book versus Market Value. Now suppose that the market value (in thousands of dollars) of Fincorp's fixed assets in 2000 is 6,000, and that the value of its long-term debt is only Administrative expenses Interest expense Federal and state taxesa Accounts payable Accounts receivable Net fixed assetsb Long-term debt Notes payable Dividends paid Cash and equivalents would increase by 100 million. Property, plant, and equipment would increase by 400 million. Long-term debt would increase by 500 million. Shareholders' equity would not increase assets and liabilities have increased equally, leaving shareholders' equity unchanged.
Because short-term debt is going to be the plug that balances the balance sheet, it must equal the difference between total assets and all other liabilities and total shareholders' equity. In F44 enter the formula F40-F55-SUM(F48 F50)-F43-F45. The balance sheets will balance and the DFNs will become zero as in Figure 6.11. If you do a comparison with the balance sheet from Model 4, you will see that the change in the short-term debt (from the previous year-end balance) is a little different from the DFN we had there because of the effect of including the change in debt in the interest expense calculation.
Owing to the importance of the balance sheet, the impact of converging to IFRS on the balance sheet must be considered. Changes to the balance sheet can change the perceptions of risk by different investors and can therefore potentially affect the ability of companies to raise capital and provide adequate returns to investors. The general changes to assets and liabilities, together with an example, are shown below. As regards liabilities, this may require
The management of cash begins with projecting the amount and timing of future cash flows.This enables firms to forecast their cash balances over the course of a specified time period. If positive net cash flows are expected, managers must identify profitable uses of that cash.Alternatively, if negative net cash flows are projected, managers must identify additional sources of cash. Possibilities include short-term debt, long-term debt, additional investments by owners, and the liquidation of assets. Other strategies might include attempting to speed up cash collections from customers and delaying payments to suppliers.
Before applying the SAVANT framework, it is useful to compare different types of external financing. Short-term debt comes in many forms. Short term usually refers to loans that must be repaid within a year, but the phrase also is applied to maturities of up to five years. Short-term debt also is characterized overall by higher interest rates than long-term debt, but can be interest free. Trade credit, where suppliers allow purchasers to buy on account, often is extended interest free for 30 days. (Similarly, people using credit cards need not typically pay interest if they pay the balance within the grace period of about 30 days.) Long-term debt also takes a variety of forms. For large corporations, it usually consists of bonds (secured by specific assets) and debentures (not secured by specific assets), but there are a host of other arrangements.
We cannot just balance the balance sheet by adding the DFN amount to the short-term debt because any change in the short-term debt will change the inter est expense, which will change the short-term debt needed to balance the balance sheet and so forth. We have a circular reference here because the interest expense on short-term debt is supposed to be calculated based on the average balance for the year. If the interest expense were to be calculated using the year-beginning balance, which is fixed, then we would not have a circular reference and we would be able to balance the balance sheet by adding the DFN amount to the short-term debt. You can think of the circular reference in more detail as follows any change in short-term debt will change the interest expense, which will change the net income, which will change the retained earnings, which will change the short-term debt needed to bring the balance sheet into balance. If you are not familiar with circular reference, look it up...
Businesses, individuals, and governments often need to raise capital. For example, suppose Carolina Power & Light (CP&L) forecasts an increase in the demand for electricity in North Carolina, and the company decides to build a new power plant. Because CP&L almost certainly will not have the 1 billion or so necessary to pay for the plant, the company will have to raise this capital in the financial markets. Or suppose Mr. Fong, the proprietor of a San Francisco hardware store, decides to expand into appliances. Where will he get the money to buy the initial inventory of TV sets, washers, and freezers Similarly, if the Johnson family wants to buy a home that costs 100,000, but they have only 20,000 in savings, how can they raise the additional 80,000 If the city of New York wants to borrow 200 million to finance a new sewer plant, or the federal government needs money to meet its needs, they too need access to the capital markets.
Long-term debt ratio long-term debt long-term debt + equity _ long-term debt Short-term debt 1,419 1,573 Long-term debt and leases 7,018 6,833 a. Long-term debt ratio long-term debt long-term debt + equity EBIT - tax 19. Leverage. A firm has a long-term debt-equity ratio of .4. Shareholders' equity is 1 million. Current assets are 200,000 and the current ratio is 2.0. The only current liabilities are notes payable. What is the total debt ratio Long-term debt ratio .4 Long-term debt 20 1 Nothing will happen to the long-term debt ratio computed using book values, since the face values of the old and new debt are equal. However, times interest earned and cash coverage will increase since the firm will reduce its interest expense. Long-term debt Long-term debt
This is another step in making the model realistic. In practice, a model like this can be tied to a corporation's debt repayment schedule and the interest rate reductions can be based on the interest rates on the actual debts maturing. The assumption that as long-term debts mature they will be replaced by short-term debt may not be completely realistic. Management may want to impose a policy of maintaining a specific relationship between short-term and long-term debt (for example, long-term debt will be 60 of total debt).
Initial public offerings (IPOs) are companies that raise capital by selling common shares to investors for the first time. Once issued, those shares trade on a public stock exchange. Index providers can screen the markets to find IPO data and create custom indexes based on IPO information.
Alternatively, small businesses might attempt to raise capital through venture capital or private equity funds, the latter including business angels. In investment terms, the big difference between this and the EIS is that the investor is usually in the position, through the deal structure, to control how the business in run.
Mattel has one note that summarizes everything under one umbrella called Seasonal financing and long-term debt. Hasbro splits this note into two. One is called Financing arrangements, for the short-term borrowings and other special arrangements, and the second is called Long-term debt.
Start with the partial model in the file Ch 06 P16 Build a Model.xls from the textbook's web site. The stock of Gao Computing sells for 55, and last year's dividend was 2.10. A flotation cost of 10 percent would be required to issue new common stock. Gao's preferred stock pays a dividend of 3.30 per share, and new preferred could be sold at a price to net the company 30 per share. Security analysts are projecting that the common dividend will grow at a rate of 7 percent a year. The firm can also issue additional long-term debt at an interest rate (or before-tax cost) of 10 percent, and its marginal tax rate is 35 percent. The market risk premium is 6 percent, the risk-free rate is 6.5 percent, and Gao's beta is 0.83. In its cost of capital calculations, Gao uses a target capital structure with 45 percent debt, 5 percent preferred stock, and 50 percent common equity. (1) Each project has a cost of 1 million. They will all be financed using the target mix of long-term debt, preferred...
Many of these early efforts were unsuccessful, and those individuals who invested in them often lost their total contributions. The nature of financing problems in these early efforts is illustrated by the story of an organization called The Society for Establishing Useful Manufacturers. In November 1791, the legislature of New Jersey passed an act incorporating this enterprise, which likely manufactured various products including paper, textiles, pottery, and wire. Davis (1917) identified this company as one of the pioneer industrial corporations of the United States and the largest and most pretentious of these'' (p. 349). Plans for the new corporation were publicly announced, including the much-criticized strategy of raising capital by issuing public stocks. The emphasis on developing domestic industry and reducing dependence on imports was appealing to potential investors, and private citizens were getting encouragement from the newly formed federal government to undertake...
Good collection policy balances conflicting goals The company wants cordial relations with its customers It also wants
There are instances of cooperation between sales managers and the financial managers who worry about collections. For example, the specialty chemicals division of a major pharmaceutical company actually made a business loan to an important customer that had been suddenly cut off by its bank. The pharmaceutical company bet that it knew its customer better than the customer's bank did and the pharmaceutical company was right. The customer arranged alternative bank financing, paid back the pharmaceutical company, and became an even more loyal customer. It was a nice example of financial management supporting sales.
Here is another type of dual economy, with a clear-cut distinction between a privileged core of large firms, in this case (almost) all under state ownership and control, and the rest. The extent of privilege varies. In Italy there are regional and local levels of the state that may function well and recognise their responsibilities for assisting small firms, through various agencies. At least in industrial districts where there is a convenient degree of sectoral specialisation, banks lend quite heavily to small firms. At the same time the large state-owned firms have been able to count on generous funding from various sources, including direct state subsidy. Much the same is true of Taiwan, which in addition has had a state sufficiently determined and sufficiently familiar with US models to set up an effective system of venture capital. On the other hand, at least until the last few years, there has been a huge gulf in mainland China between state-owned firms with access to large...
There are several important differences between the two categories of borrowers. Microfinance is most often provided by non-bank institutions such as NGO MFIs that are often based on the group-lending approach (although numerous microfinance loans may consist of loans to individuals rather than to groups), as well as various membership-based financial cooperatives and mutual-assistance associations. SME finance is provided mainly by banks, building societies, and non-bank financial institutions (NBFIs) and does not use a group-lending approach. Another important difference is security Microfinance is almost never formally secured, although informal security (i.e., not legally binding) in the form of collateral interest over household goods and tools is commonly used, while SME finance usually allows a firm's assets or personal guarantees to legally secure small business loans. Those differences create a natural separation between the institutions that specialize mainly in microfinance...
Some analysts use a subjective, ad hoc procedure to estimate a firm's cost of common equity they simply add a judgmental risk premium of 3 to 5 percentage points to the interest rate on the firm's own long-term debt. It is logical to think that firms with risky, low-rated, and consequently high-interest-rate debt will also have risky, high-cost equity, and the procedure of basing the cost of equity on a readily observable debt cost utilizes this logic. For example, if an extremely strong firm such as BellSouth had bonds which yielded 8 percent, its cost of equity might be estimated as follows
On the financial side, additional tools to protect against economic risk are the currency denomination of long-term debt, the place of issue, the maturity structure, the capital structure, and leasing versus buying. For example, LSI Logic, a manufacturer of custom-made microchips based in California, uses four financial instruments (1) equity markets in London and other European markets (2) Japanese equity through institutional investors such as Nomura Securities (3) local Japanese credit markets through its joint venture partners and (4) Eurobond issues through Swiss and US securities firms.
Chew, Managing Director of Corporate & Government Ratings at Standard & Poor's, recalls that immediately after Enron filed for bankruptcy protection some questioned whether project and structured finance would survive in their current form. Indeed, some corporations with large amounts of off-balance-sheet financing and inadequate disclosure were subjected to increased scrutiny, and sustained sharply reduced valuations for both their equity and debt. In response such companies expanded their liquidity and reduced their debt to the minimum possible. Chew however, believes that, as time passes, the main fallout of the Enron bankruptcy and other recent market shocks may not be a turning away from project finance, but rather a greater stress on bottom-up evaluation of how companies generate recurring free cash flow and what might affect that cash flow over time. Chew believes that in this process project, as well as structured, finance will probably continue to play an important...
This situation can cause managers to make a serious error in selecting projects, a process called capital budgeting. To illustrate, assume that NCC is currently at its target capital structure, and it is now considering how to raise capital to finance next year's projects. NCC could raise a combination of debt and equity, but to minimize flotation costs it will raise either debt or equity, but not both. Suppose NCC borrows heavily at 8 percent during 2003 to finance long-term projects that yield 10 percent. In 2004, it has new long-term projects available that yield 13 percent, well above the return on the 2003 projects. However, to return to its target capital structure, it must issue equity, which costs 15.3 percent. Therefore, the company might incorrectly reject these 13 percent projects because they would have to be financed with funds costing 15.3percent.
When asked which distressed debt types they are engaged in, 94 of the banks questioned listed business loans, with mortgages real estate loans coming in a close second at 89 (multiple answers were possible). Only half of the banks deal with distressed debt in consumer loans, and only 39 have such engagements in bonds. This information indicates that the focus of distressed debt is primarily on large volume loans, given that business loans or mortgages real estate loans usually involve much greater amounts than consumer loans. This is also evident in the information provided by banks on the nominal volume of distressed debt transactions. In both business loans, as well as mortgages real estate loans, more than 70 of all transactions hover above the EUR 100 million mark. Transactions involving a volume of less than EUR 50 million are indeed the exception in the distressed debt business (see Fig. 3).
His chapter introduces the basic sources of long-term financing common stock, preferred stock, and long-term debt. Later chapters discuss these topics in more detail. Perhaps no other area of corporate finance is more perplexing to new students of finance than corporate securities such as shares of stock, bonds, and debentures. Whereas the concepts are simple and logical, the language is strange and unfamiliar. The purpose of this chapter is to describe the basic features of long-term financing. We begin with a look at common stock, preferred stock, and long-term debt and then briefly consider patterns of the different kinds of long-term financing. Discussion of nonbasic forms of long-term finance, such as convertibles and leases, is reserved for later chapters.
Business loan is traditionally defined as a loan to a company with less than S5 million in annua sales. (It's the business that is small and not the loan, which could start at J 100,000.) Often such loans can he handled by the lender's small business loan department. If your company does better than that, it would probably seek a commercial loan.
The undated perpetual bonds of the early nineteenth century and the noncallable 100-year corporate bonds so popular in 1900 all but vanished. Investors became maturity-conscious the early concept of a permanent annuity lost its appeal. A sinking fund was sometimes considered an added attraction, and call prices unfavorable to investors were often accepted passively. Investors, in other words, evinced a livelier desire to secure the repayment of their principal and less concern for an assured income. Conversely, corporate debtors wished to retain control of their capital structures by call and sinking-fund options or by serial maturities. Few in the 1990's would think of committing themselves or their successors to receive or make a payment in the year 2361 or the year 2862 these are the maturity dates of two noncallable railroad bonds issued before 1900. Up to the 1960's, most new corporate bond issues matured in twenty to forty years. However, in the 1970's and 1980's, following...
We do however have to make an important distinction between the firms under direct shareholder control and the rest. Managers in the former have every reason to take a long view those in control of them expect to stay in for the long haul. The dominant shareholders have every incentive to engage and to understand even low-visibility activities intended to make money in future. Why should managers then sacrifice the long-term good of the firm to please ignorant outsider shareholders True, they could by pleasing them raise their share price and thus make it easier to raise capital by issuing shares, or to finance a takeover by a share-for-share exchange. But that would dilute the dominant shareholders'
With the information provided by the banks surveyed in response to the request to assess the experience and difficulties with transactions it becomes evident that banks have little experience with business loan transactions and that they rate the level of difficulty inherent in such transactions as high . Only 39 of the surveyed banks give their experience with business loans high marks, while 28 classify their level of experience as low. The picture is completely different with bonds, where 80 of the banks surveyed cite high levels of experience and 73 do not see any difficulties with bond transactions. The results are almost the same for mortgages real estate loans, where 67 claim high experience levels and only 39 see any difficulties. In other words, banks do indeed have experiences with bonds as well as mortgages real estate loans, while based on their own feedback, the majority of German banks still lack this know-how in relation to business loan transactions.
A variety of long-term borrowing arrangements will be discussed in Chapter 9, Non-current Liabilities, but for the present, bear in mind that as time goes by long-term debts become short-term debts. For this reason, the current liabilities of many firms include the portion of long-term debt that matures within the coming year. Note in Exhibit 8-1 that Ersatz International reports 7.4 million among its current liabilities, described as the current portion of long-term debt. On the balance sheets of previous years, this amount was included in Ersatz's long-term debts because it was not due within a year of the balance sheet date. During 2000, however, the amount was reclassified from long-term debt to a current liability. This amount is a claim against the company's current assets in the coming year.
Euronotes are short-term debt instruments underwritten by a group of international banks called a facility. An MNC makes an agreement with a facility to issue Euronotes in its own name for a number of years. Euronotes typically have maturities from 1 month to 6 months, but many MNCs continually roll them over as a source of medium-term financing. Euronotes are sold at a discount from face value and pay back the full value at maturity. Euro commercial paper (ECP), like domestic commercial paper, consists of unsecured short-term promissory notes sold by finance companies and certain industrial companies. These notes are issued only by the most creditworthy companies, because they are not secured. Their maturities range from 1 month to 6 months. Like Euronotes, Euro commercial paper is sold at a discount from face value. Table 11.2 shows the year-end value of the Euronote and Euro commercial paper market in billions of US dollars from 1997 to 2001.
For some purposes a one-factor analysis might be appropriate. Corporations planning to issue long-term debt, for example, might not find it worthwhile to study how the two-year rate moves relative to the 30-year rate. But for fixed income professionals exposed to the risk of the term structure reshaping, one-factor models usually prove inadequate.
High Growth With the transition to a publicly traded firm, financing choices increase. While the firm's revenues are growing rapidly, earnings are likely to lag behind revenues, and internal cash flows lag behind reinvestment needs. Generally, publicly traded firms at this stage will look to more equity issues, in the form of common stock, warrants and other equity options. If they are using debt, convertible debt is most likely to be used to raise capital.
In this section, we continue our discussion of corporate debt by describing in some detail the basic terms and features that make up a typical long-term corporate bond. We discuss additional issues associated with long-term debt in subsequent sections. Long-Term Debt The Basics Ultimately, all long-term debt securities are promises made by the issuing firm to pay principal when due and to make timely interest payments on the unpaid balance. Beyond this, there are a number of features that distinguish these securities from one another. We discuss some of these features next. The maturity of a long-term debt instrument is the length of time the debt remains outstanding with some unpaid balance. Debt securities can be short term (with maturities of one year or less) or long term (with maturities of more than one year).1 Short-term debt is sometimes referred to as unfunded debt.2 Debt securities are typically called notes, debentures, or bonds. Strictly speaking, a bond is a secured debt....
BusinessCreditUSA.com is an Internet business credit portal that provides business credit reports for public and private U.S. companies and executives. The database currently has 12 million records, and according to the company, approximately 55 percent of the records are from businesses with fewer than four employees. This is a good source for finding fax, telephone, and address data verifying a business's existence and stability and generating sales leads. Reports are 5.00. The database is searchable by company or executive name, city, state, telephone number, or ABI number. Each report contains the company name, address, names of select executives, phone, fax, credit rating, number of employees, ticker symbol, SIC code(s), competitors, link to the company's Website, and competitors in the area.
In the previous subsection, we assumed that the debt of the firm was risk-free. Risk-free debt is necessarily default-free debt but the reverse is not necessarily true. There are two sources of risk associated with debt. One is interest rate risk, which is associated with general changes in long-term interest rates, and the other is credit risk, which is associated with the possibility of default. All long-term debt, even if it is default-free, will see its value move inversely with long-term interest rates (bond yields), as Chapter 2 observed. Asset values, however, also tend to move inversely with long-term interest rates, which means that long-term debt, even if it is default-free, tends to have a positive beta (typically, around 0.2 when computed with respect to broad-based stock portfolios like the S&P 500). Risk-free debt is necessarily short-term, because it cannot have its value altered by changes in long-term interest rates. Short-term default-free debt tends to have a beta...
Straight bonds These bonds have fixed maturities and carry a fixed rate of interest. Straight bonds are repaid by amortization or in a lump sum at the maturity date. The amortization method refers to the retirement of a long-term debt by making a set of equal periodic payments. These periodic payments include both interest and principal. Alternatively, a borrower may retire his or her bonds by redeeming the face value of the bonds at maturity. Under this method, a fixed interest on the face value of the bonds is paid at regular intervals.
Operating working capital is comprised of operating cash, accounts receivable, inventories, and other current assets (such as prepaid expenses) less accounts payable, and other current liabilities (such as taxes payable). It does not include short-term sources of funds such as short-term debt or dividends payable. Between 1994 and 1998, net working capital was about 3 percent of revenues, with the exception of 1996 and 1997 (which were acquisition years). The only significant change in any single line item seems to be other current liabilities. We believe this will revert to a normal level of about 11.8 percent of revenues, generating a forecasted level of working capital of 3.3 percent of revenues. We model the existing debt to be paid off as given in the notes to the accounting items in the annual report. We assume that the short-term debt is the amount paid off in the year of a given debt's maturity.
Municipal (also known as muni) money market funds invest in short-term debt issued by state and local governments. All municipal money funds are free of federal taxes. Those investors who limit their investing to just one state are free of state taxes as well (provided you live in that state). So if you live in New York and buy a New York municipal bond fund, you shouldn't have to pay any tax, state or federal, on your dividends.
Operating activities, which includes net income, depreciation, and changes in current assets and liabilities other than cash, short-term investments, and short-term debt. 3. Financing activities, which includes raising cash by selling short-term investments or by issuing short-term debt, long-term debt, or stock. Also, because both dividends paid and cash used to buy back outstanding stock or bonds reduce the company's cash, such transactions are included here.
The amounts involved were mind-boggling. Besides CDOs, explosive or otherwise, the great bulk of credit derivatives are credit swaps, a category at first incidental to this housing- and mortgage-focused chapter. However, their large-scale emergence after 1998 was what turned credit from a dull backwater into a financial market blockbuster. . . . The outstanding notional value of credit derivatives contracts has doubled every year since the start of this decade to reach 26 trillion in the middle of last year 2006 . 7 By October 2007, the newly merged Chicago Mercantile Exchange reported that the notional value of credit derivatives had climbed to 45.5 trillion. By year's end, as bank and investment bank losses began to pile up, some exporters began to fear that problems might spread into the corporate credit markets,
This item is not unlike the bank loans items in the way it flows through the report. Additional borrowings increase cash repayments reduce cash. The separate classification and different labels simply reflect the fact that long-term debt is shown on a different line on the balance sheet, so it is typically shown on a separate line in the statement of cash flow, to help the reader associate the two statements when reading the company's financial report. In this particular month, the company made a 1,000 payment on its long-term debt and did not borrow any more money in this category, so the net change is a reduction of 1,000. We can't be perfectly certain of this from the short format in our example, but logic tells us that a net change in cash of so small an amount was unlikely to include anything other than a monthly payment. A quick look at the balance sheets for this month and the month before (March 2003 in our example) would confirm our notion that no new debt was incurred.
Source Data from Lehman Brothers and filler, Anderson & Sherrerd, as reported in Thomas L. Bennett, Stephen F. Esser, and Christian G. Roth, Corporate Credit Risk and Reward (West Conshohocken, PA Miller, Anderson & Sherrerd, 1993). Reprinted by permission. Source Data from Lehman Brothers and filler, Anderson & Sherrerd, as reported in Thomas L. Bennett, Stephen F. Esser, and Christian G. Roth, Corporate Credit Risk and Reward (West Conshohocken, PA Miller, Anderson & Sherrerd, 1993). Reprinted by permission.
Short-term Planning. Paymore Products Places Orders For Goods Equal To 75 Percent Of Its Sales Forecast In The Next
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 which 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 golden mean by financing all fixed 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. f. The firm issues 1 million of long-term debt and uses the proceeds to repay a short-term bank loan. 18. Forecasting Net Cash Flow. Assuming that Paymore's labor and administrative expenses are 65 per quarter and that interest on long-term debt is 40 per quarter, work out the net cash inflow for Paymore for the coming year using a table like Table 2.7. Long-term debt 3 a. This...
Land law provides a critical portion of the legal infrastructure for private sector investment and a modern financial system. Secure land rights allow investors with a safe time horizon to invest and to recoup investments and, thus, are an important element in the incentive structure for investment. Also, marketable land rights allow land to move to those who will use it more efficiently and who are thus willing to pay more for it, increasing its productive use. In addition, mortgageable land rights can be used to raise capital for investments, and those rights can play a key role in capital formation in developing economies. On the financial side, mortgageability is the critical characteristic of land. It is vital to allow individuals to be able to raise capital for the capitalization of the economy. Land is the primary form of collateral for credit. Land registration also can provide a link to the owner's credit history, an accountable address for the collection of debts and taxes,...
Suppose that Dynamic can borrow up to 40 million from the bank at an interest cost of 8 percent per year or 2 percent per quarter. Dynamic can also raise capital by putting off paying its bills and thus increasing its accounts payable. In effect, this is taking a loan from its suppliers. The financial manager believes that Dynamic can defer the following amounts in each quarter
Qualcomm employs about 7,000 people and is headquartered in San Diego. By March 2000, Qualcomm had redeemed all its convertible preferred securities and had very little long-term debt. Its capital structure was Long-term debt Market value of stock Why does Qualcomm rely so little on long-term debt This question was asked of Anthony S. Thornley, Executive Vice President and Chief Financial Officer of Qualcomm. RWJ One thing that stands out from a financial point of view about Qualcomm is that it has almost no long-term debt. Why AST There currently isn't any reason to leverage the company. We can finance our growth from retained earnings and outside equity. RWJ Outside equity AST With our high P E ratio we have a very low cost of equity. RWJ Qualcomm is in a very competitive business. Is this a factor in the capital structure Revenues Net income Long-term debt Dividend payout ( ) Return on equity (ROE) ( ) Five-year compound annual growth in revenues Recent price-to-earnings ratio
Note I should mention that large businesses commonly create relatively autonomous units within the organization that, in addition to having responsibility for their profit and cost centers, also have broad authority and control over investing in assets and raising capital for their assets. These organization units are called, quite logically, investment centers. Basically, an investment center is a mini business within the larger conglomerate. Discussing investment centers is beyond the scope of this chapter.
CHAPTER 16 Raising Capital Chapter 16 examines the process of raising capital.Two of the most interesting subjects covered deal with firms that are just getting started and raise funds in the venture capital market and firms that are contemplating going public, for example, selling stock to the public for the first time.
Supreme Court Decision Substantially Broadens Producer Liability For Injuries Suffered By Product Users
The interest rate a company pays on its short-term debt borrowing is increased by its bank. Oil prices unexpectedly decline. An oil tanker ruptures, creating a large oil spill. A manufacturer loses a multimillion-dollar product liability suit. A Supreme Court decision substantially broadens producer liability for injuries suffered by product users.
We will use the symbol E (for equity) to stand for the market value of the firm's equity. We calculate this by taking the number of shares outstanding and multiplying it by the price per share. Similarly, we will use the symbol D (for debt) to stand for the market value of the firm's debt. For long-term debt, we calculate this by multiplying the market price of a single bond by the number of bonds outstanding. If there are multiple bond issues (as there normally would be), we repeat this calculation of D for each and then add up the results. If there is debt that is not publicly traded (because it is held by a life insurance company, for example), we must observe the yield on similar, publicly traded debt and then estimate the market value of the privately held debt using this yield as the discount rate. For short-term debt, the book (accounting) values and market values should be somewhat similar, so we might use the book values as estimates of the market values.
Total debt Short-term borrowing + Long-term debt + Current portion of long-term debt + Notes payable First, to find out Mattel's total debt, add up Mattel's short-term and long-term debt obligations Current portion of long-term debt 50,000 Long-term debt 550,000,000 First, to find out Hasbro's total debt, add up Hasbro's short-term and long-term debt obligations Current portion of long-term debt 135,348,000 Long-term debt 709,723,000
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