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Short Term Financing Costs Analysis

This document discusses the calculation of costs for different types of short-term financing: 1) Trade credit cost is calculated based on the cash discount percentage and number of days between the discount date and due date. 2) Bank loan effective interest rate takes into account the loan amount, stated interest rate, compensation balance, taxes, and number of days to calculate the actual cost to the borrower. 3) Commercial paper cost is expressed as a percentage yield calculated from the face value, net sale value which accounts for flotation costs, and number of days to maturity.

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414 views6 pages

Short Term Financing Costs Analysis

This document discusses the calculation of costs for different types of short-term financing: 1) Trade credit cost is calculated based on the cash discount percentage and number of days between the discount date and due date. 2) Bank loan effective interest rate takes into account the loan amount, stated interest rate, compensation balance, taxes, and number of days to calculate the actual cost to the borrower. 3) Commercial paper cost is expressed as a percentage yield calculated from the face value, net sale value which accounts for flotation costs, and number of days to maturity.

Uploaded by

cayeva8452
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Short Term Financing Math

Cost of Trade Credit


A business can purchase materials for
Tk.100000 on credit terms 3/30, net 90. What
is the cost of this trade credit?

Cost of Trade Credit=


[ % of Cash Discount
100 %−% of Cash Discount][ ]
∗
360
N

N= Difference between Due date and Discount Date


Given,
Cash discount= 3%
Discount date= 30 days
Due date= 90 Days

Cost of Trade Credit=


[ 3%
100 %−3 % ][
∗
360
90−30 ]
Cost of Trade Credit=.1855=18.55 %
A business can purchase materials for
Tk.100000 on credit terms 3/30, net 90. But
company paid 100000 taka on 120th days.
What is the cost of this trade credit?

Cost of Trade Credit=


[ % of Cash Discount
100 %−% of Cash Discount ][ ]
∗
360
N'

'
N =Difference Between Actual Payment date∧Discount Date

Given,
Cash discount= 3%
Discount date= 30 days
Due date= 90 Days
Actual Payment date= 120

Cost of Trade Credit=


[ 3%
100 %−3 % ][
∗
360
120−30 ]
Cost of Trade Credit=.1237=12.37 %
Cost of Bank Loan
National housing ltd has negotiated Tk.200000, 180
days, 8% loan with Brac Bank ltd. Calculate the effective
cost of this loan under loan discounting, 10%
compensating balance, considering 35% tax and
applying bankers’ year.
Interest Amount (I )=
[ L∗i∗N
360 ]
L= Loan Amount
i= Interest Rate
N= no of days

Given,
L= 200000
i= 8%=.08
N= 180 Days

Interest Amount (I )=
[ 200000∗.08∗180
360 ]
Interest Amount ( I )=8000 TK

Compensating Balance (CB)=[ L∗% of Compendating Balance ]


Compensating Balance(CB)=[ 200000∗10 % ]
Compensating Balance (CB )=20000 TK

Net Proceed(Lo)=[ L−Compensating Balance−Loan Discount −Commission−Other expenses ]


Net Proceed(Lo)=[ 200000−20000−8000−0−0 ]

Net Proceed(Lo)=1, 72,000

[ ]
I
∗360
Lo
Effective Interest Rate (EIR)=
N

[ ]
8000
∗360
172000
Effective Interest Rate (EIR)=
180

Effective Interest Rate ( EIR )=.0930=9.30 %

Cost of Commercial Paper


A commercial paper with face value Tk.1000 sold for
Tk.950 with flotation cost 10 tk for 120 days. What is
the cost or yield of this paper?
Cost of CP=
[ FV −NSV
NSV ][ ]
∗
360
N
Given
FV= 1000
NSV (Net Sale Value)= SV- Flotation cost
= 950- 10 =940 TK
N= 120 days

Cost of CP=
[
1000−940
940
∗
][ ]
360
120
Cost of CP=0.191=19.10 %

I need 100000 TK
DBBL Interest Rate is 10%.
CNG- 200
Open Account DBBL- 1000
Doc- 500
CNG- 200
Commission- 2000
Total other cost-3900 TK ----------Flotation cost

Need Proceed= 100000-3900= 96100 TK.

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