Principles of Managerial Finance,
Brief Edition, 8th Edition by
Lawrence J. Gitman
Complete Chapter Solutions Manual
are included (Ch 1 to 15)
** Immediate Download
** Swift Response
** All Chapters included
** Excel Solutions
,Table of Contents are given below
1.The Role of Managerial Finance
2.The Financial Market Environment
3.Financial Statements and Ratio Analysis
4.Long- and Short-Term Financial Planning
5.Time Value of Money
6.Interest Rates and Bond Valuation
7.Stock Valuation
8.Risk and Return
9.The Cost of Capital
10.Capital Budgeting Techniques
11.Capital Budgeting Cash Flows and Risk Refinements
12.Leverage and Capital Structure
13.Payout Policy
14.Working Capital and Current Assets Management
15.Current Liabilities Management
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure that all
chapters are included in this document. (Complete Chapters included Ch15-1)
Chapter 15
Current Liabilities Management
Instructor’s Resources
Overview
This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability,
and risk in managing the firm’s current liability accounts. The management of current liabilities requires
choosing appropriate levels of financing and involves tradeoffs between risk and profitability. This chapter also
reviews sources of secured and unsecured short-term financing, including the role of international loans.
Spontaneous sources, such as accounts payable and accruals, are differentiated from negotiated bank sources, such
as lines of credit. The cash discount offered on accounts payable and the cost of forgoing such discounts are
described. Secured sources include bank and commercial finance company loans, backed by collaterals such as
inventory or accounts receivable. Whether borrowing funds as a manager or for their own personal use, effective
management of current liabilities is essential, making Chapter 15 relevant at the professional and personal levels.
Answers to Review Questions
1. The two major sources of spontaneous short-term financing (financing that arises from the normal operating
cycle) are accounts payable and accruals. Both of these sources are spontaneous because they increase and
decrease directly with increases or decreases in sales. If sales increase, the firm will purchase more materials
and increase employment, resulting in higher values for these items.
2. There is no cost⎯stated or unstated⎯associated with taking a cash discount; there is a cost of giving up a
cash discount. By giving up a cash discount, the purchaser pays the full price for merchandise but can make
the payment later. The unstated cost of giving up a cash discount is the implied rate of interest paid to delay
payments. This rate can be used to make decisions with respect to whether or not the discount should be
taken. If the cost of giving up the cash discount is greater than the cost of borrowing short-term funds, the
firm should take the discount. Cash discounts can be a source of additional profitability for a firm. However,
some firms, either due to lack of alternative funding sources or ignorance of the true cost, fail to take
advantage of these discounts.
3. Stretching accounts payable is the process of delaying the payment of accounts payable for as long as
possible without damaging the firm’s credit rating. Stretching payments reduces the implicit cost of giving up
a cash discount.
4. The prime rate of interest is a rate charged on business loans to creditworthy business borrowers. It is usually
used by lenders as a base rate. Lenders add a premium to that base rate that depends on the borrower’s credit
risk to determine the rate on the loan. A floating-rate loan has its interest tied to the prime rate. The rate of
interest is established at an increment above the prime rate and floats at that increment above prime over the
term of the note.
, 322 Zutter/Smart • Principles of Managerial Finance Brief, Eighth Edition
5. The effective interest rate is the actual rate of interest paid for the period. The calculation of this rate depends
on whether interest is paid at maturity or in advance (deducted from the loan so that the borrower receives
less than the requested amount). When interest is paid at maturity, the effective interest rate is equal to:
Interest
Amount borrowed
The effective interest rate when interest is paid in advance—a discount loan—is calculated as follows:
Interest
Amount borrowed − Interest
Paying interest in advance raises the effective rate above the stated rate.
6. A single-payment note is an unsecured loan from a commercial bank. It usually has a short maturity⎯30 to
90 days⎯and the interest rate is normally tied in some way to the prime rate of interest. The interest rate on
these notes may be fixed or floating. The effective annual interest rate when the note is rolled over throughout
the year on the same terms is calculated on a compound basis as follows, using Equation 5.11 in the text.
m
⎛ r ⎞
reff = ⎜ 1 + ⎟ − 1
⎝ m⎠
7. A line of credit is an agreement between a commercial bank and a business that states the amount of
unsecured short-term borrowing the bank will make available to the firm over a given period of time.
a. In a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in
the firm’s financial condition or operations.
b. To ensure that the borrower will be a good customer, frequently a line of credit will require the borrower
to maintain compensating balances in a demand deposit. In some cases, fees in lieu of balances may be
negotiated.
c. To ensure that money lent under the credit agreement is actually being used to finance seasonal needs,
banks require that the borrower have a zero loan balance for a certain number of days per year. This is
called the annual cleanup period.
8. A revolving credit agreement is a guaranteed line of credit. Under a line of credit agreement, a firm
is not guaranteed that the bank will have funds available to lend upon demand, while under the more formal
revolving credit agreement, the availability of funds is guaranteed. Because the lender under the revolving
credit agreement guarantees the availability of funds, the borrower must pay a commitment fee, a fee levied
against the average unused portion of the line.
9. Commercial paper (CP), which is a short-term, unsecured promissory note, is usually sold by large,
creditworthy firms in order to raise funds. Commercial paper is merely the IOU of a financially
sound firm. The maturity of commercial paper is generally from 3 to 270 days and is normally
issued in multiples of $100,000 or more. The interest rate on commercial paper is usually 1% to 2% below the
prime rate and is a less costly source of short-term funds than bank loans. Commercial paper is purchased by
corporations, life insurance companies, pension funds, banks, and other financial institutions and investors.
Commercial paper may be sold directly by the issuing firm to a purchaser or may be sold through a
middleman known as a commercial paper house, which charges a fee to the issuer for its marketing efforts.
10. International transactions differ from domestic ones because they involve payments made or received in a
foreign currency. This results in additional foreign costs and also exposes the company to foreign exchange
risk.
Brief Edition, 8th Edition by
Lawrence J. Gitman
Complete Chapter Solutions Manual
are included (Ch 1 to 15)
** Immediate Download
** Swift Response
** All Chapters included
** Excel Solutions
,Table of Contents are given below
1.The Role of Managerial Finance
2.The Financial Market Environment
3.Financial Statements and Ratio Analysis
4.Long- and Short-Term Financial Planning
5.Time Value of Money
6.Interest Rates and Bond Valuation
7.Stock Valuation
8.Risk and Return
9.The Cost of Capital
10.Capital Budgeting Techniques
11.Capital Budgeting Cash Flows and Risk Refinements
12.Leverage and Capital Structure
13.Payout Policy
14.Working Capital and Current Assets Management
15.Current Liabilities Management
,Solutions Manual organized in reverse order, with the last chapter displayed first, to ensure that all
chapters are included in this document. (Complete Chapters included Ch15-1)
Chapter 15
Current Liabilities Management
Instructor’s Resources
Overview
This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability,
and risk in managing the firm’s current liability accounts. The management of current liabilities requires
choosing appropriate levels of financing and involves tradeoffs between risk and profitability. This chapter also
reviews sources of secured and unsecured short-term financing, including the role of international loans.
Spontaneous sources, such as accounts payable and accruals, are differentiated from negotiated bank sources, such
as lines of credit. The cash discount offered on accounts payable and the cost of forgoing such discounts are
described. Secured sources include bank and commercial finance company loans, backed by collaterals such as
inventory or accounts receivable. Whether borrowing funds as a manager or for their own personal use, effective
management of current liabilities is essential, making Chapter 15 relevant at the professional and personal levels.
Answers to Review Questions
1. The two major sources of spontaneous short-term financing (financing that arises from the normal operating
cycle) are accounts payable and accruals. Both of these sources are spontaneous because they increase and
decrease directly with increases or decreases in sales. If sales increase, the firm will purchase more materials
and increase employment, resulting in higher values for these items.
2. There is no cost⎯stated or unstated⎯associated with taking a cash discount; there is a cost of giving up a
cash discount. By giving up a cash discount, the purchaser pays the full price for merchandise but can make
the payment later. The unstated cost of giving up a cash discount is the implied rate of interest paid to delay
payments. This rate can be used to make decisions with respect to whether or not the discount should be
taken. If the cost of giving up the cash discount is greater than the cost of borrowing short-term funds, the
firm should take the discount. Cash discounts can be a source of additional profitability for a firm. However,
some firms, either due to lack of alternative funding sources or ignorance of the true cost, fail to take
advantage of these discounts.
3. Stretching accounts payable is the process of delaying the payment of accounts payable for as long as
possible without damaging the firm’s credit rating. Stretching payments reduces the implicit cost of giving up
a cash discount.
4. The prime rate of interest is a rate charged on business loans to creditworthy business borrowers. It is usually
used by lenders as a base rate. Lenders add a premium to that base rate that depends on the borrower’s credit
risk to determine the rate on the loan. A floating-rate loan has its interest tied to the prime rate. The rate of
interest is established at an increment above the prime rate and floats at that increment above prime over the
term of the note.
, 322 Zutter/Smart • Principles of Managerial Finance Brief, Eighth Edition
5. The effective interest rate is the actual rate of interest paid for the period. The calculation of this rate depends
on whether interest is paid at maturity or in advance (deducted from the loan so that the borrower receives
less than the requested amount). When interest is paid at maturity, the effective interest rate is equal to:
Interest
Amount borrowed
The effective interest rate when interest is paid in advance—a discount loan—is calculated as follows:
Interest
Amount borrowed − Interest
Paying interest in advance raises the effective rate above the stated rate.
6. A single-payment note is an unsecured loan from a commercial bank. It usually has a short maturity⎯30 to
90 days⎯and the interest rate is normally tied in some way to the prime rate of interest. The interest rate on
these notes may be fixed or floating. The effective annual interest rate when the note is rolled over throughout
the year on the same terms is calculated on a compound basis as follows, using Equation 5.11 in the text.
m
⎛ r ⎞
reff = ⎜ 1 + ⎟ − 1
⎝ m⎠
7. A line of credit is an agreement between a commercial bank and a business that states the amount of
unsecured short-term borrowing the bank will make available to the firm over a given period of time.
a. In a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in
the firm’s financial condition or operations.
b. To ensure that the borrower will be a good customer, frequently a line of credit will require the borrower
to maintain compensating balances in a demand deposit. In some cases, fees in lieu of balances may be
negotiated.
c. To ensure that money lent under the credit agreement is actually being used to finance seasonal needs,
banks require that the borrower have a zero loan balance for a certain number of days per year. This is
called the annual cleanup period.
8. A revolving credit agreement is a guaranteed line of credit. Under a line of credit agreement, a firm
is not guaranteed that the bank will have funds available to lend upon demand, while under the more formal
revolving credit agreement, the availability of funds is guaranteed. Because the lender under the revolving
credit agreement guarantees the availability of funds, the borrower must pay a commitment fee, a fee levied
against the average unused portion of the line.
9. Commercial paper (CP), which is a short-term, unsecured promissory note, is usually sold by large,
creditworthy firms in order to raise funds. Commercial paper is merely the IOU of a financially
sound firm. The maturity of commercial paper is generally from 3 to 270 days and is normally
issued in multiples of $100,000 or more. The interest rate on commercial paper is usually 1% to 2% below the
prime rate and is a less costly source of short-term funds than bank loans. Commercial paper is purchased by
corporations, life insurance companies, pension funds, banks, and other financial institutions and investors.
Commercial paper may be sold directly by the issuing firm to a purchaser or may be sold through a
middleman known as a commercial paper house, which charges a fee to the issuer for its marketing efforts.
10. International transactions differ from domestic ones because they involve payments made or received in a
foreign currency. This results in additional foreign costs and also exposes the company to foreign exchange
risk.
