FREE online courses on How to Manage Cash Flow - Chapter 3 - Unsecured
Financing
For large corporations
with financially sound operations, cash can be obtained on the credit worthiness
of the corporation; i.e. unsecured financing. Smaller organizations can
sometimes obtain unsecured financing, but costs are often much higher than
secured financing. For large corporations in the United States, commercial paper is perhaps the most popular form
of unsecured financing. Commercial paper is sold at a discount in the form of a
promissory note. The promissory notes are short-term, usually less than 270
days. Example 12 illustrates the costs of commercial paper.
Example 12 --- Calculate
Costs of Commercial Paper
Bowie Corporation will
issue $ 500,000 of 90 day, 16% commercial paper. The funds will be used for 70
days. Unused funds can be invested at 12%. The broker will charge 1.5% for the
issuance of commercial paper. What is the total costs of this financing
arrangement?
Interest Expense = $
500,000 x .16 x ( 90 / 360 ) =
$ 20,000
Brokers Fee = $ 500,000
x .015 = 7,500
Less Return on Unused
Funds = $ 500,000 x .12 x ( 20 / 360 ) (3,333)
Total Costs of Commercial Paper
$ 24,167
This concludes the
overall process of cash flow management: Cash Flow Cycles, Cash Flow
Forecasting, and Short Term Financing. We will now finish-up by touching on some
finer points in cash flow
management.
