Managing Current Liabilities

The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .

The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.

What are the advantages of leveraging this company? The disadvantages? How would leveraging up affect the company’s taxes? How would the capital markets react to a decision by the company to increase the use of debt in its capital structure?

As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie 's accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term

Creditors normally focus on the liquidity or solvency of the borrower in terms of current ratio and quick ratio, which indicate whether the company has enough working capital to cover the short-term debts. Myer will enter into a syndicated facility agreement to refinance the existing borrowings of the Myer Group. Besides, creditors are interested in the business risks the company might undertake, which indicate the possibility that the company might be unable to pay back the long-term liability in the future. From this point, the expectation on high return on investment and high profitability in the long run make the creditor’s interest aligned with shareholders’ value.

There are uncertainties in whether a receivable is sold or being used as a collateral for a loan. Thus, FASB has provided guidelines to distinguish between the two. FASB ASC 860-10-40-3 states that a financial asset should be considered sold and therefore should be derecognized if it is transferred and control is surrendered. Moreover, when control over the receivables is not surrendered, the transaction should be treated as a collateralized borrowing. FASB ASC 860-10-40 on the subject of conditions for a sale of financial assets states that a financial asset should be considered sold if it is transferred and control is surrendered. Control is deemed to be

1. This is a contract from credit card receivables securitization, a kind of bonds finance collateralized by credit card receivables. Every Contract of security has a face value at maturity of $100,000 and will mature in 2.5 to 5 years. The price of the contract changes by 1/32 a point but cannot be 3 points above or below the previous day’s

Based on the Time Interest Earned Ratio Landry’s ability to pay interest bills from profit earned decreased. In 2002 Landry’s could pay their interest bill just over 13 times from earnings before interest tax. In 2003 Landry’s ability to pay interest bills was almost cut in-half to 7 times. We think that as a result of the decrease in ability to pay interest bills, creditors could be concerned about these findings.

It seems then that companies should fully leverage the company or a least come close to doing so but there is a probability that the company enters financial distress as its leverage (D/E) increases. Financial distress can be very costly for companies, and the cost for this scenario is shown in the current market value of the levered firm's securities. Investors factor the potential for future distress into their assessment of the present value (this is where PV of distress costs is subtracted from un-levered company value and the PV of the tax-shield.) The value for the costs

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for

From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.

Furthermore, if an organisation does not have enough cash resources in order to settle its current liabilities, this will highlight great inefficiency with stock turnover not being sold. A good company such as Sainsbury’s we see is healthy because revenue is recognised from inventories sold – this revenue allows cash to flow in order to pay for short term and long-term liabilities. It is evident that there are insufficient cash flowing into the company from investing activities and financing activities, which are shown by the brackets.

Any time an enterprise guarantees the indebtedness of another in material amounts, the enterprise must disclose the nature and amount of the guarantees in the notes to the financial statements. When Enron's SPEs sought credit, the lenders often required that Enron guarantee the debt. On several occasions, Enron guaranteed amounts that various SPEs borrowed by promising to pay cash or to issue additional common shares to repay the debt if the market price of Enron's common shares dropped under a set amount or if Enron's bond rating fell below investment grade. While the notes to Enron's financial statements disclosed guarantees of the indebtedness of others, Enron did not mention that its potential liability on those guarantees, which shared common debt

Harris and Reviv (1990) gave one more reason of using debt in capital structure. They say that management will hide information from shareholders about the liquidation of the firm even if the liquidation will be in the best interest of shareholders because managers want the perpetuation of their service. Similarly, Amihud and Lev (1981) suggest that mangers have incentives to pursue strategies that reduce their employment risk. This conflict can be solved by increasing the use of debt financing since bondholders will take control of the firm in case of default as they are powered to do so by the debt indentures. Stulz (1990) said when shareholders cannot observe either the investing decisions of management or the cash flow position in the firm, they will use debt financing. Managers, to maintain credibility, will over-invest if it has extra cash and under-invest if it has limited cash. Stulz (1990) argued that to reduce the cost of underinvestment and overinvestment, the amount of free cash flow should be reduced to

Issue Commercial Papers – It is identified in (Short Term Finance:Commercial Paper, 2008) that a commercial paper is simply unsecured short-term debt instrument issued by an organization for meeting short-term liabilities. An advantage of issuing commercial papers is that only companies with high credit ratings can do so, therefore, a company like MRM can enjoy the prestige with such an issuance. Also it is cheaper than a bank loan as it has low interest rates. However a disadvantage could be that there are no flexibilities with regard to