Credit Management.ppt

1、,Corporate Finance Ross Westerfield Jaffe,Sixth Edition,Chapter Outline,29.1 Terms of the Sale 29.2 The Decision to Grant Credit: Risk and Information 29.3 Optimal Credit Policy 29.4 Credit Analysis 29.5 Collection Policy 29.6 How to Finance Trade Credit 29.7 Summary & Conclusions,Introduction,A fir

2、ms credit policy is composed of: Terms of the sale Credit analysis Collection policy This chapter discusses each of the components of credit policy that makes up the decision to grant credit.,The Cash Flows of Granting Credit,Credit sale is made,Customer mails check,Firm deposits check,Bank credits

3、firms account,29.1 Terms of the Sale,The terms of sale of composed of Credit Period Cash Discounts Credit Instruments,Credit Period,Credit periods vary across industries. Generally a firm must consider three factors in setting a credit period: The probability that the customer will not pay. The size

4、 of the account. The extent to which goods are perishable. Lengthening the credit period generally increases sales,Cash Discounts,Often part of the terms of sale. Tradeoff between the size of the discount and the increased speed and rate of collection of receivables. An example would be “3/10 net 30

5、” The customer can take a 3% discount if he pays within 10 days. In any event, he must pay within 30 days.,The Interest Rate Implicit in 3/10 net 30,A firm offering credit terms of 3/10 net 30 is essentially offering their customers a 20-day loan. To see this, consider a firm that makes a $1,000 sal

6、e on day 0,Some customers will pay on day 10 and take the discount.,Other customers will pay on day 30 and forgo the discount.,A customer that forgoes the 3% discount to pay on day 30 is borrowing $970 for 20 days and paying $30 interest:,The Interest Rate Implicit in 3/10 net 30,Credit Instruments,

7、Most credit is offered on open accountthe invoice is the only credit instrument. Promissory notes are IOUs that are signed after the delivery of goods Commercial drafts call for a customer to pay a specific amount by a specific date. The draft is sent to the customers bank, when the customer signs t

8、he draft, the goods are sent. Bankers acceptances allow a bank to substitute its creditworthiness for the customer, for a fee. Conditional sales contracts let the seller retain legal ownership of the goods until the customer has completed payment.,29.2 The Decision to Grant Credit: Risk and Informat

9、ion,Consider a firm that is choosing between two alternative credit policies: “In God we trusteverybody else pays cash.” Offering their customers credit.,The only cash flow of the first strategy is,The expected cash flows of the credit strategy are:,29.2 The Decision to Grant Credit: Risk and Inform

10、ation,The NPV of the cash only strategy is,The NPV of the credit strategy is,The decision to grant credit depends on four factors: The delayed revenues from granting credit, The immediate costs of granting credit, The probability of repayment, h The discount rate, rB,Example of the Decision to Grant

11、 Credit,A firm currently sells 1,000 items per month on a cash basis for $500 each. If they offered terms net 30, the marketing department believes that they could sell 1,300 items per month. The collections department estimates that 5% of credit customers will default. The cost of capital is 10% pe

12、r annum.,Example of the Decision to Grant Credit,The NPV of cash only:,The NPV of Net 30:,Example of the Decision to Grant Credit,How high must the credit price be to make it worthwhile for the firm to extend credit?,The NPV of Net 30 must be at least as big as the NPV of cash only:,The Value of New

13、 Information about Credit Risk,The most that we should be willing to pay for new information about credit risk is the present value of the expected cost of defaults:,In our earlier example, with a credit price of $500, we would be willing to pay $26,000 for a perfect credit screen.,Future Sales and

14、the Credit Decision,Our first decision:,We face a more certain credit decision with our paying customers:,29.3 Optimal Credit Policy,C*,Costs in dollars,Level of credit extended,At the optimal amount of credit, the incremental cash flows from increased sales are exactly equal to the carrying costs f

15、rom the increase in accounts receivable.,29.3 Optimal Credit Policy,Trade Credit is more likely to be granted if: The selling firm has a cost advantage over other lenders. The selling firm can engage in price discrimination. The selling firm can obtain favorable tax treatment. The selling firm has n

16、o established reputation for quality products or services. The selling firm perceives a long-term strategic relationship. The optimal credit policy depends on the characteristics of particular firms.,29.4 Credit Analysis,Credit Information Financial Statements Credit Reports on Customers Payment His

17、tory with Other Firms Banks Customers Payment History with the Firm Credit Scoring: The traditional 5 Cs of credit Character Capacity Capital Collateral Conditions Some firms employ sophisticated statistical models,29.5 Collection Policy,Collection refers to obtaining payment on past-due accounts. C

18、ollection Policy is composed of The firms willingness to extend credit as reflected in the firms investment in receivables. Collection Effort,Average Collection Period,Measures the average amount of time required to collect an account receivable.,For example, a firm with average daily sales of $20,0

19、00 and an investment in accounts receivable of $150,000 has an average collection period of,Accounts Receivable Aging Schedule,Shows receivables by age of account. The longer an account has been unpaid, the less likely it is to be paid.,Collection Effort,Most firms follow a protocol for customers th

20、at are past due: Send a delinquency letter. Make a telephone call to the customer. Employ a collection agency. Take legal action against the customer. There is a potential for a conflict of interest between the collections department and the sales department. You need to strike a balance between ant

21、agonizing a customer and being taken advantage of by a deadbeat.,Factoring,The sale of a firms accounts receivable to a financial institution (known as a factor). The firm and the factor agree on the basic credit terms for each customer.,Firm,Factor,Customer,Customers send payment to the factor,The

22、factor pays an agreed-upon percentage of the accounts receivable to the firm. The factor bears the risk of nonpaying customers,Goods,29.6 How to Finance Trade Credit,There are three general ways of financing accounting receivables: Secured Debt Referred to as asset-based receivables financing. The p

23、redominant form of receivables financing. Captive Finance Company Large companies with good credit ratings often form a finance company as a subsidiary of the firm. Securitization Occurs when the selling firm sells its accounts receivable to a financial institution, which then pools the receivables

24、and sells securities backed by these assets.,29.7 Summary & Conclusions,The components of a firms credit policy are the terms of sale, the credit analysis, and the collection policy. The decision to grant credit is a straightforward NPV problem. Additional information about the probability of custom

25、er default has value, but must be weighed against the cost of the information. The optimal amount of credit is a function of the conditions in which a firm finds itself. The collection policy is the firms method for dealing with past-due accountsit is an integral part of the decision to extend credi

26、t.,Corporate Finance Ross Westerfield Jaffe,Sixth Edition,Chapter Outline,30.1 The Basic Forms of Acquisitions 30.2 The Tax Forms of Acquisitions 30.3 Accounting for Acquisitions 30.4 Determining the Synergy from an Acquisition 30.5 Source of Synergy from Acquisitions 30.6 Calculating the Value of t

27、he Firm after an Acquisition 30.7 A Cost to Stockholders from Reduction in Risk 30.8 Two Bad Reasons for Mergers 30.9 The NPV of a Merger 30.10 Defensive Tactics 30.11 Some Evidence on Acquisitions 30.12 The Japanese Keiretsu 30.13 Summary and Conclusions,30.1 The Basic Forms of Acquisitions,There a

28、re three basic legal procedures that one firm can use to acquire another firm: Merger Acquisition of Stock Acquisition of Assets,Varieties of Takeovers,Takeovers,30.2 The Tax Forms of Acquisitions,If it is a taxable acquisition, selling shareholders need to figure their cost basis and pay taxes on a

29、ny capital gains. If it is not a taxable event, shareholders are deemed to have exchanged their old shares for new ones of equivalent value.,30.3 Accounting for Acquisitions,The Purchase Method The source of much “goodwill” Pooling of Interests Pooling of interest is generally used when the acquirin

30、g firm issues voting stock in exchange for at least 90 percent of the outstanding voting stock of the acquired firm. Purchase accounting is generally used under other financing arrangements.,30.4 Determining the Synergy from an Acquisition,Most acquisitions fail to create value for the acquirer. The

31、 main reason why they do not lies in failures to integrate two companies after a merger. Intellectual capital often walks out the door when acquisitions arent handled carefully. Traditionally, acquisitions deliver value when they allow for scale economies or market power, better products and service

32、s in the market, or learning from the new firms.,30.5 Source of Synergy from Acquisitions,Revenue Enhancement Cost Reduction Including replacing ineffective managers. Tax Gains Net Operating Losses Unused Debt Capacity The Cost of Capital Economies of Scale in Underwriting.,30.6 Calculating the Valu

33、e of the Firm after an Acquisition,Avoiding Mistakes Do not Ignore Market Values Estimate only Incremental Cash Flows Use the Correct Discount Rate Dont Forget Transactions Costs,30.7 A Cost to Stockholders from Reduction in Risk,The Base Case If two all-equity firms merge, there is no transfer of s

34、ynergies to bondholders, but if One Firm has Debt The value of the levered shareholders call option falls. How Can Shareholders Reduce their Losses from the Coinsurance Effect? Retire debt pre-merger.,30.8 Two Bad Reasons for Mergers,Earnings Growth Only an accounting illusion. Diversification Share

35、holders who wish to diversify can accomplish this at much lower cost with one phone call to their broker than can management with a takeover.,30.9 The NPV of a Merger,Typically, a firm would use NPV analysis when making acquisitions. The analysis is straightforward with a cash offer, but gets compli

36、cated when the consideration is stock.,The NPV of a Merger: Cash,NPV of merger to acquirer =,Synergy Premium,Premium = Price paid for B - VB,NPV of merger to acquirer = Synergy - Premium,The NPV of a Merger: Common Stock,The analysis gets muddied up because we need to consider the post-merger value

37、of those shares were giving away.,Cash versus Common Stock,Overvaluation If the target firm shares are too pricey to buy with cash, then go with stock. Taxes Cash acquisitions usually trigger taxes. Stock acquisitions are usually tax-free. Sharing Gains from the Merger With a cash transaction, the t

38、arget firm shareholders are not entitled to any downstream synergies.,30.10 Defensive Tactics,Target-firm managers frequently resist takeover attempts. It can start with press releases and mailings to shareholders that present managements viewpoint and escalate to legal action. Management resistance

39、 may represent the pursuit of self interest at the expense of shareholders. Resistance may benefit shareholders in the end if it results in a higher offer premium from the bidding firm or another bidder.,Divestitures,The basic idea is to reduce the potential diversification discount associated with

40、commingled operations and to increase corporate focus, Divestiture can take three forms: Sale of assets: usually for cash Spinoff: parent company distributes shares of a subsidiary to shareholders. Shareholders wind up owning shares in two firms. Sometimes this is done with a public IPO. Issuance if

41、 tracking stock: a class of common stock whose value is connected to the performance of a particular segment of the parent company.,The Corporate Charter,The corporate charter establishes the conditions that allow a takeover. Target firms frequently amend corporate charters to make acquisitions more

42、 difficult. Examples Staggering the terms of the board of directors. Requiring a supermajority shareholder approval of an acquisition,Repurchase Standstill Agreements,In a targeted repurchase the firm buys back its own stock from a potential acquirer, often at a premium. Critics of such payments lab

43、el them greenmail. Standstill agreements are contracts where the bidding firm agrees to limit its holdings of another firm. These usually leads to cessation of takeover attempts. When the market decides that the target is out of play, the stock price falls.,Exclusionary Self-Tenders,The opposite of

44、a targeted repurchase. The target firm makes a tender offer for its own stock while excluding targeted shareholders.,Going Private and LBOs,If the existing management buys the firm from the shareholders and takes it private. If it is financed with a lot of debt, it is a leveraged buyout (LBO). The e

45、xtra debt provides a tax deduction for the new owners, while at the same time turning the pervious managers into owners. This reduces the agency costs of equity,Other Devices and the Jargon of Corporate Takeovers,Golden parachutes are compensation to outgoing target firm management. Crown jewels are

46、 the major assets of the target. If the target firm management is desperate enough, they will sell off the crown jewels. Poison pills are measures of true desperation to make the firm unattractive to bidders. They reduce shareholder wealth. One example of a poison pill is giving the shareholders in a target firm the right