AFM231 Chapter Notes - Chapter 26: Subrogation, Security Interest

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lemonbeetle804

13 Aug 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM231

Professor

Darren Charters

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Document Summary

Secured credit: a debt where the creditor has an interest in the debtor"s property to secure payment. Unsecured credit: a debt where the creditor has only a contractual right to be repaid. Letter of credit: a written promise by a buyer"s bank to a seller"s bank to pay the seller when specified conditions are met. Events of default: failure by the debtor to make required payments on a loan or to fulfill its other obligations under the credit agreement. Collateral: property in which a creditor ta kes an interest as security for a borrower"s promise to repay a loan. Letter of commitment: a document that is provided by a lender to a borrower and sets out the terms of a loan. Amount of the loan and how it will be disbursed. Rate of interest, and whether it is floating or fixed. Repayment terms, including the amount and frequency of payments. Term of the loan and conditions for renewal.

Related Questions

1. Your bank says that they will loan you money based on a 90% loan-to-value ratio. The seller has accepted your offer for $150,000 but the appraiser arrived at an appraised value of $145,000. Calculate the amount of your loan and the amount of your down payment.
2. You agreed to pay $190,000 for your new home and the bank agrees to lend you $152,000; they will be charging you 2 points for the loan. Calculate the dollar amount of the points that you have to pay the bank.
3. Your lender has agreed to loan you $75,000 on the following terms: - Annual payments consisting of "interest only" (no contributions toward principal, until pay-off at the very end) - 8% annual interest rate - 5 year term a. Calculate the first annual payment b. Calculate the very last (final) payment
4. What is a "Package Loan"? How is it different than a "Blanket Loan"?
5. Describe a "Due on Sale" clause? What is another name for it?
6. In your reading about the APR, which of the following are included in the calculation of the APR? (When you are answering this say "yes" if it is covered and "no" if not covered and also refer to the letter (ie, the answer to "a" is: ___) . interest due on the loan a. credit life insurance (required by lender) b. private mortgage insurance (required by lender) c. loan origination fees d. borrower's attorney fees

P16â20 Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender. The firmâs accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of the inventory is $300,000, of which $120,000 is finished goods. (Note: Assume a 365-day year.)

(1) City-Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% on the outstanding loan balance plus a 0.25% administration fee levied against the $100,000 initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be $75,000.

(2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13%.

(3) Citizensâ Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods inventory and charge 15% annual interest on the outstanding loan balance. A 0.5% warehousing fee will be levied against the average amount borrowed. Because the loan will be liquidated as inventory is sold, the average loan balance is expected to be $60,000.

a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $100,000.

b. Which plan do you recommend? Why?

c. If the firm had made a purchase of $100,000 for which it had been given terms of 2/10 net 30, would it increase the firmâs profitability to give up the discount and not borrow as recommended in part b? Why or why not?

graysalmon542

Q: P16â20 Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender. The firmâs accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of the inventory is $300,000, of which $120,000 is finished goods. (Note: Assume a 365-day year.) (1) City-Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% on the outstanding loan balance plus a 0.25% administration fee levied against the $100,000 initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be $75,000. (2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13%. (3) Citizensâ Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods inventory and charge 15% annual interest on the outstanding loan balance. A 0.5% warehousing fee will be levied against the average amount borrowed. Because the loan will be liquidated as inventory is sold, the average loan balance is expected to be $60,000.

a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $100,000.

b. Which plan do you recommend? Why?

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AFM231 Chapter Notes - Chapter 26: Subrogation, Security Interest

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