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This course contains the basics of Financial ManagementCourse introduction
Working Capital Management
The Costs of Financial Distress: Xerox Renegotiates Its Credit Line
During 2002, Xerox needed to renegotiate its $7 billion credit line,much of which was scheduled to expire in October of that year.The company had been incurring large losses for several years and was in the process of disposing of unprofitable lines of business and terminating thousands of employees. Xerox was also dealing with an accounting fraud scandal that, while neither admitting nor denying guilt, required the company to pay $10 million in civil penalties in a settlement with the Securities and Exchange Commission.The company had been near bankruptcy in late 2000, and its credit rating had fallen into the high-yield, junk bond category.
The new credit facility negotiated with its banks limited Xerox's revolving credit line to $4.2 billion, down from the $7 billion under its existing agreement. It consisted of a $1.5 billion revolving credit line and three term loans totaling $2.7 billion.The first term loan of $700 million had to be repaid by September 2002, with the remaining term loan and revolving credit line maturing on April 30, 2005. The interest rate on the new credit agreement increased significantly. Under its existing credit line, Xerox was paying an interest rate of the London Interbank Offer Rate (LIBOR) plus 0.5 percent. Borrowing under the new credit agreement would cost the company LIBOR plus 4.5 percent. LIBOR was 2.4 percent at the time of the agreement.
Despite the lower credit limit under the new agreement, Xerox expected its interest expenses to increase by as much as $140 million in the following year (2003). In addition to the lower borrowing limits and higher interest rates, the credit agreement also contained covenants that restricted the financial decision making of the company. For example, the agreement required Xerox to maintain a minimum net worth and limited its capital expenditures. Also, the company was prohibited from paying cash dividends on its common stock during the life of the agreement. This example illustrates some of the issues involved when a company facing financial distress is seeking to borrow money in the credit markets.The second part of the chapter examines the various sources and costs of short-term credit, such as bank credit lines, that can be used to finance a firm's operations.Introduction
The first half of the chapter deals with the management of working capital, which involves decisions about the optimal overall level of current assets and the optimal mix of short-term and long-term funds used to finance the company's assets. These decisions require an analysis of the risk and expected return trade-offs associated with the various alternative policies.
The second half of the chapter examines the various sources of short-term credit available to the firm.Working Capital Policy
Working capital policy involves decisions about a company's current assets and current liabilities— what they consist of, how they are used, and how their mix affects the risk versus return characteristics of the company. Both the terms working capital and net working capital normally denote the difference between the company's current assets and current liabilities. The two terms are often used interchangeably.
Working capital policies, through their effect on the firm's expected future returns and the risk associated with these returns, ultimately have an impact on shareholder wealth. Effective working capital policies are crucial to a firm's long-run growth and survival. If, for example, a company lacks the working capital needed to expand production and sales, it may lose revenues and profits.Working capital is used by firms to maintain liquidity, that is, the ability to meet their cash obligations as they come due. Otherwise, it may incur the costs associated with a deteriorating credit rating, a potential forced liquidation of assets, and possible bankruptcy.
Working capital management is a continuing process that involves a number of day-today operations and decisions that determine the following:
Working capital differs from fixed capital in terms of the time required to recover the investment in a given asset. In the case of fixed capital or long-term assets (such as land, buildings, and equipment), a company usually needs several years or more to recover the initial investment. In contrast, working capital is turned over, or circulated, at a relatively rapid rate. Investments in inventories and accounts receivable are usually recovered during a firm's normal operating cycle, when inventories are sold and receivables are collected.
Importance of Working Capital
It has already been noted that a firm must have working capital to operate and survive. In many industries, working capital (current assets) constitutes a relatively large percentage of total assets. In the manufacturing sector, for example, current assets comprise about 40 percent of the total assets of all U.S. manufacturing corporations. Among the wholesaling and retailing sectors, the percentages are even higher—in the 50 to 60 percent range. shows the distribution of aggregate assets for several large companies. For the five companies shown, current assets as a percentage of total assets range from about 25 percent to over 50 percent. ExxonMobil, with its relatively high percentage of fixed assets, has a relatively low percentage of current assets.
In contrast,Walgreens, a retail pharmacy chain, has a relatively high percentage of current assets.Walgreens, with a large number of retail outlets, has almost 37 percent of its assets invested in inventories. IBM, which finances customer purchases of some of its products, has about 28 percent of its assets in receivables. Because current assets constitute a relatively high percentage of total assets in most businesses, it is important to have effective working capital policies. In a survey of large industrial corporations, it was found that about 30 percent of the companies have a formal policy for the management of their working capital and another 60 percent have an informal policy.
A significantly greater percentage of the larger companies within the sample have a formal policy than do the smaller companies. In almost onehalf of the companies that responded to the survey, the financial vice president has responsibility for establishing the company's overall working capital policy. The president and treasurer are the next most frequently mentioned positions as having responsibility for working capital policy. There is considerable variation in the frequency with which companies review their working capital policy. Annual, quarterly, and monthly reviews are mentioned with about the same relative frequency (approximately 14 to 18 percent), whereas approximately one-half of the companies review working capital policy "whenever necessary."
A firm's net working capital position is not only important from an internal standpoint; it is also widely used as one measure of the firm's risk. Risk, as used in this context, deals with the probability that a firm will encounter financial difficulties, such as the inability to pay bills on time. All other things being equal, the more net working capital a firm has, the more likely it is to be able to meet current financial obligations. Because net working capital is one measure of risk, a company's net working capital position affects its ability to obtain debt financing. Many loan agreements with commercial banks and other lending institutions contain a provision requiring the firm to maintain a minimum net working capital position. Likewise, bond indentures also often contain such provisions.
Operating Cycle Analysis
A company's operating cycle typically consists of three primary activities: purchasing resources, producing the product, and distributing (selling) the product. These activities create cash flows that are both unsynchronized and uncertain. They are unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example, collection of receivables). They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy. If the firm is to maintain liquidity and function properly, it has to invest funds in various short-term assets (working capital) during this cycle.
It has to maintain a cash balance to pay the bills as they come due. In addition, the company must invest in inventories to fill customer orders promptly. And, finally, the company invests in accounts receivable to extend credit to its customers. Figure illustrates the operating cycle of a typical firm. The operating cycle is equal to the length of the inventory and receivables conversion periods:
Operating cycle = Inventory conversion period + Receivables conversion period
The inventory conversion period is the length of time required to produce and sell the product. It is defined as follows:
Average inventory Inventory conversion period = ————————— Cost of sales/365
The receivables conversion period, or average collection period, represents the length of time required to collect the sales receipts. It is calculated as follows:
Average accounts receivable Receivables conversion period = ————————————— Annual credit sales/365
Operating Cycle of a Typical Company
The payables deferral period is the length of time the firm is able to defer payment on its various resource purchases (e.g., materials). The following equation is used to calculate the payables deferral period:
Payable Average accounts payable deferral = ———————————— period Cost of sales/365
Finally, the cash conversion cycle represents the net time interval between the collection of cash receipts from product sales and the cash payments for the company's various resource purchases. It is calculated as follows:
Cash conversion cycle = Operating cycle – Payables deferral period
The cash conversion cycle shows the time interval over which additional nonspontaneous sources of working capital financing must be obtained to carry out the firm's activities. An increase in the length of the operating cycle, without a corresponding increase in the payables deferral period, lengthens the cash conversion cycle and creates further working capital financing needs for the company. Table shows an actual cash conversion cycle analysis for Walgreen Co., a drugstore retailer.Walgreen's liquidity, as measured by the current and quick ratios, appears to have improved in 2002 compared to 2001.
The reduction of Walgreen's cash conversion cycle from 44.9 days in 2001 to 43.6 days in 2002 indicates a more efficient utilization of its working capital. This was due primarily to over a 2-day reduction in its inventory conversion period, indicating that the company was turning over its inventory at a faster rate. Its receivables conversion period actually deteriorated slightly from 2001 to 2002 and its payables deferral period remained about the same.Levels of Working Capital Investment
Overall working capital policy considers both a firm's level of working capital investment and its financing. In practice, the firm has to determine the joint impact of these two decisions upon its profitability and risk. However, to permit a better understanding of working capital policy, the working capital investment decision is discussed in this section, and the working capital financing decision is discussed in the following section. The two decisions are then considered together. The size and nature of a firm's investment in current assets is a function of a number of different factors, including the following:
For the purposes of discussion and analysis, these factors are held constant for the remainder of this chapter. Instead of focusing on these factors, this section examines the risk–return trade-offs associated with alternative levels of working capital investment.
Profitability Versus Risk Trade-Off for Alternative Levels of Working Capital Investment
Before deciding on an appropriate level of working capital investment, a firm's management has to evaluate the trade-off between expected profitability and the risk that it may be unable to meet its financial obligations. Profitability is measured by the rate of (operating) return on total assets; that is, EBIT/total assets. As mentioned earlier in this chapter, the risk that a firm will encounter financial difficulties is related to the firm's net working capital position.
illustrates three alternative working capital policies.Each curve in the figure demonstrates the relationship between the firm's investment in current assets and sales for that particular policy.
Policy C represents a conservative approach to working capital management. Under this policy, the company holds a relatively large proportion of its total assets in the form of current assets. Because the rate of return on current assets is normally assumed to be less than the rate of return on fixed assets,this policy results in a lower expected profitability as measured by the rate of return on the company's total assets. Assuming that current liabilities remain constant, this type of policy also increases the company's net working capital position, resulting in a lower risk that the firm will encounter financial difficulties.
In contrast to Policy C, Policy A represents an aggressive approach. Under this policy, the company holds a relatively small proportion of its total assets in the form of lower-yielding current assets and thus has relatively less net working capital. As a result, this policy yields a higher expected profitability and a higher risk that the company will encounter financial difficulties.
Finally, Policy M represents a moderate approach.With this policy, expected profitability and risk levels fall between those of Policy C and Policy A.
These three approaches may be illustrated with the following example. Suppose Burlington Resources has forecasted sales next year to be $100 million and EBIT to be $10 million. The company has fixed assets of $30 million and current liabilities totaling $20 million. Burlington Resources is considering three alternative working capital investment policies:
Assume that sales and EBIT remain constant under each policy contains the results of the three proposed policies. The aggressive policy would yield the highest expected rate of return on total assets, 15.38 percent, whereas the conservative policy would yield the lowest rate of return, 13.33 percent. The aggressive policy would also result in a lower net working capital position ($15 million) than would the conservative policy ($25 million). Using net working capital as a measure of risk, the aggressive policy is the riskiest and the conservative policy is the least risky. The current ratio is another measure of a firm's ability to meet financial obligations as they come due. The aggressive policy would yield the lowest current ratio, and the conservative policy would yield the highest current ratio.
Optimal Level of Working Capital Investment
The optimal level of working capital investment is the level expected to maximize shareholder wealth. It is a function of several factors, including the variability of sales and cash flows and the degree of operating and financial leverage employed by the firm. Therefore, no single working capital investment policy is necessarily optimal for all firms.
Three Alternative Working Capital Investment Policies
In practice, however, this assumption may not be completely realistic because a firm's sales are usually a function of its inventory and credit policies. Higher levels of finished goods inventories and a more liberal credit extension policy —both of which increase a firm's investment in current assets—may also lead to higher sales. This effect can be incorporated into the analysis by modifying the sales and EBIT projections under the various alternative working capital policies. Although changing these projections would affect the numerical values contained in, it does not affect the general conclusions concerning the profitability versus risk trade-offs.Proportions of Short-Term and Long-Term Financing
Not only does a firm have to be concerned about the level of current assets; it also has to determine the proportions of short- and long-term debt to use in financing these assets. This decision also involves trade-offs between profitability and risk. Sources of debt financing are classified according to their maturities. Specifically, they can be categorized as being either short-term or long-term, with short -term sources having maturities of one year or less and long-term sources having maturities of greater than one year.
Cost of Short-Term Versus Long-Term Debt
Recall from Previous Chapter that the term structure of interest rates is defined as the relationship among interest rates of debt securities that differ in their length of time to maturity. Historically, long-term interest rates have normally exceeded short-term rates. Also, because of the reduced flexibility of long-term borrowing relative to short-term borrowing, the effective cost of long-term debt may be higher than the cost of short-term debt, even when short-term interest rates are equal to or greater than long-term rates.With long-term debt, a firm incurs the interest expense even during times when it has no immediate need for the funds, such as during seasonal or cyclical downturns. With short-term debt, in contrast, the firm can avoid the interest costs on unneeded funds by paying off (or not renewing) the debt. In summary, the cost of long-term debt is generally higher than the cost of short-term debt.
Risk of Long-Term Versus Short-Term Debt
Borrowing companies have different attitudes toward the relative risk of long-term versus short-term debt than do lenders. Whereas lenders normally feel that risk increases with maturity, borrowers feel that there is more risk associated with short-term debt. The reasons for this are twofold.
First, there is always the chance that a firm will not be able to refinance its short-term debt.When a firm's debt matures, it either pays off the debt as part of a debt reduction program or arranges new financing. At the time of maturity, however, the firm could be faced with financial problems resulting from such events as strikes, natural disasters, or recessions that cause sales and cash inflows to decline. Under these circumstances the firm may find it very difficult or even impossible to obtain the needed funds. This could lead to operating and financial difficulties. The more frequently a firm must refinance debt, the greater is the risk of its not being able to obtain the necessary financing.
Second, short-term interest rates tend to fluctuate more over time than long-term interest rates. As a result, a firm's interest expenses and expected earnings after interest and taxes are subject to more variation over time with short-term debt than with long-term debt.
Profitability Versus Risk Trade-Off for Alternative Financing Plans
A company's need for financing is equal to the sum of its fixed and current assets. Current assets can be divided into the following two categories:
Fluctuating current assets are those affected by the seasonal or cyclical nature of company sales. For example, a firm must make larger investments in inventories and receivables during peak selling periods than during other periods of the year. Permanent current assets are those held to meet the company's minimum long-term needs (for example, "safety stocks" of cash and inventories). illustrates a typical firm's financing needs over time. The fixed assets and permanent current assets lines are upward sloping, indicating that the investment in these assets and, by extension, financing needs tend to increase over time for a firm whose sales are increasing.
One way in which a firm can meet its financing needs is by using a matching approach in which the maturity structure of the firm's liabilities is made to correspond exactly to the life of its assets, as illustrated in. Fixed and permanent current assets are financed with long-term debt and equity funds, whereas fluctuating current assets are financed with short-term debt.Application of this approach is not as simple as it appears, however. In practice, the uncertainty associated with the lives of individual assets makes the matching approach difficult to implement.
illustrate two other financing plans. shows a conservative approach, which uses a relatively high proportion of long-term debt. The relatively low proportion of short-term debt in this approach reduces the risk that the company will be unable to refund its debt, and it also reduces the risk associated with interest rate fluctuations. At the same time, however, this approach cuts down on the expected returns available to stockholders because the cost of long-term debt is generally greater than the cost of short-term debt.
illustrates an aggressive approach, which uses a relatively high proportion of short-term debt. A firm that uses this particular approach must refinance debt more frequently, and this increases the risk that it will be unable to obtain new financing as needed.
In addition, the greater possible fluctuations in interest expenses associated with this financing plan also add to the firm's risk. These higher risks are offset by the higher expected after tax earnings that result from the normally lower costs of short-term debt.
Financing Needs over Time
Matching Approach to Asset Financing
Consider again Burlington Resources, which has total assets of $70 million and common shareholders' equity of $28 million on its books, thus requiring $42 million in shortor long-term debt financing. Forecasted sales for next year are $100 million and expected EBIT is $10 million. Interest rates on the company's short-term and long-term debt are 8 and 10 percent, respectively, due to an upward-sloping yield curve.
Conservative Approach to Asset Financing
Aggressive Approach to Asset Financing
Burlington Resources is considering three different combinations of short-term and longterm debt financing:
shows the data for each of these alternative proposed financing plans. From the standpoint of profitability, the aggressive financing plan would yield the highest expected rate of return to the stockholders—13.6 percent—whereas the conservative plan would yield the lowest rate of return—12.9 percent. In contrast, the aggressive plan would involve a greater degree of risk that the company will be unable to refund its debt because it assumes $30 million in short-term debt and the conservative plan assumes only $10 million in shortterm debt. This is substantiated further by the fact that the company's net working capital position and current ratio would be lowest under the aggressive plan and highest under the conservative plan—making the degree of risk that the company will be unable to meet financial obligations greater with the aggressive plan. The moderate financing plan represents a middle-of-the-road approach, and the expected rate of return and risk level are between the aggressive and the conservative approaches. In summary, both expected profitability and risk increase as the proportion of short-term debt increases.
Profitability and Risk of Alternative Financing Policies for Burlington
Optimal Proportions of Short-Term and Long-Term Debt
As is the case with working capital investment policy, no one combination of short- and longterm debt is necessarily optimal for all firms. In choosing a financing policy that maximizes shareholder wealth, a firm's financial manager must also take into account various other factors, such as the variability of sales and cash flows, that affect the valuation of the firm.Overall Working Capital Policy
Until now, this chapter has analyzed the working capital investment and financing decisions independent of one another in order to examine the profitability–risk trade-offs associated with each, assuming that all other factors are held constant. Effective working capital policy, however, also requires the consideration of the joint impact of these decisions on the firm's profitability and risk.
Referring to Burlington Resources again, assume that the company is 60 percent debt financed (both short-term and long-term) and 40 percent financed with common stock. Also, it is evaluating three alternative working capital investment and financing policies. The aggressive policy would require a relatively small investment in current assets, $35 million, and a relatively large amount of short-term debt, $30 million. The conservative policy would require a relatively large investment in current assets, $45 million, and a relatively small amount of short-term debt, $10 million. The firm is also considering a middle -ofthe- road approach, which would involve a moderate investment in current assets, $40 million, and a moderate amount of short-term debt, $20 million.
shows the data for each approach. The aggressive working capital policy is expected to yield the highest return on shareholders' equity, 15.4 percent, whereas the conservative policy is expected to yield the lowest return, 11.3 percent. The net working capital and current ratio are lowest under the aggressive policy and highest under the conservative policy, indicating that the aggressive policy is the riskiest. The moderate policy yields an expected return and risk level somewhere between the aggressive and the conservative policies.
Whereas this type of analysis will not directly yield the optimal working capital investment and financing policies a company should choose, it can give the financial manager some insight into the profitability-risk trade-offs of alternative policies.With an understanding of these trade-offs, the financial manager should be able to make better decisions concerning the working capital policy that will lead to a maximization of shareholder wealth.Short-Term Credit
A company normally employs a combination of short- and intermediate-term credit and long-term debt and equity in financing its current and fixed assets. The various sources of long-term financing have already been discussed. This section focuses on the major sources of short-term credit.
Short-term credit includes all of a company's debt obligations that originally were scheduled for repayment within one year. Short -term credit may be either unsecured or secured.In the case of unsecured short -term debt, a firm obtains credit from the lender without having to pledge any specific assets as collateral, and the lender depends primarily on the cash-generating ability of the firm to repay the debt. If the firm becomes insolvent and declares bankruptcy, the unsecured lender usually stands little chance of recovering all or even a significant portion of the amount owed.
Alternative Working Capital Investment and Financing Policies for Burlington Resources (in Millions of Dollars)
In the case of secured short-term debt, the borrower pledges certain specified assets— such as accounts receivable, inventory, or fixed assets—as collateral. The Uniform Commercial Code,which was adopted by all states during the 1960s, outlines the procedures that must be followed in order for a lender to establish a valid claim on a firm's collateral. The first step in this process involves the execution of a security agreement, which is a contract between the lender and the firm specifying the collateral held against the loan. The security agreement is then filed at the appropriate public office within the state where the collateral is located.
Future potential lenders can check with this office to determine which assets the firm has pledged and which are still free to be used as collateral. Filing this security agreement legally establishes the lender's security interest in the collateral. If the borrower defaults on the loan or otherwise fails to honor the terms of the agreement, the lender can seize and sell the collateral to recover the amount owed. Thus, the lender in a secured short-term debt agreement has two potential sources of loan repayment: the firm's cash-generating ability and the collateral value of the pledged assets.
Short-term lenders can be classified as either cash-flow lenders or asset-based lenders, depending upon how they view the two potential sources of loan repayment. Cash-flow lenders look upon the borrower's future cash flows as the primary source of loan repayment and the borrower's assets as a secondary source of repayment. Asset-based lenders tend to make riskier loans than cash-flow lenders, and as a result, they place much greater emphasis on the value of the borrower's collateral. Generally, large, low-leveraged companies with good expected cash flows are able to borrow from cash-flow lenders, such as commercial banks, at relatively low rates. Smaller, highly leveraged businesses with more uncertain future cash flows often have to borrow on a secured basis from asset-based lenders, such as commercial finance companies, at relatively high rates.
In general, companies prefer to borrow funds on an unsecured basis because the added administrative costs involved in pledging assets as security raise the cost of the loan to the borrower. In addition, secured borrowing agreements can restrict a company's future borrowing. Many companies, particularly small ones, are not able to obtain unsecured credit, however. For example, a company may be financially weak or too new to justify an unsecured loan, or it may want more credit than the lender is willing to give on an unsecured basis. In any of these circumstances, either the company must provide collateral or it will not receive the loan. The short-term credit sources available to a company can be either spontaneous or negotiated. Spontaneous sources, which include trade credit, accrued expenses, and deferred income, are discussed in upcoming sections. Later sections of this chapter consider the various negotiated sources, such as bank credit, commercial paper, receivables loans, and inventory loans.Cost of Short-Term Funds
Managers need a method to calculate the financing cost for the various sources of short-term financing available to a firm. gives the amount of interest paid, I, on borrowed money:
I = PV0*i *n
where I = the interest amount in dollars; PV0 = the principal amount at time 0, or the present value; i = the interest rate per time period; and n = the number of time periods. Solving for i, we obtain
I 1 i = —— * — PV0 n
The interest rate, i, is equal to the fractional interest cost per period, I/PV0, times 1 divided by the number of time periods, or 1/n.
The equation we use to calculate the annual financing cost,AFC, for short-term financing sources is a variation of
Interest costs + fees 365 AFC = ————————— Trade Credit
Whenever a business receives merchandise ordered from a supplier and is then permitted to wait a specified period of time before having to pay, it is receiving trade credit. In the aggregate, trade credit is the most important source of short-term financing for business firms. Smaller businesses in particular usually rely heavily on trade credit to finance their operations because they are often unable to obtain funds from banks or other lenders in the financial markets.
Most trade credit is extended on an open account basis. A firm sends a purchase order to a supplier, who then evaluates the firm's creditworthiness using various information sources and decision criteria. If the supplier decides to extend the firm credit, it ships the ordered merchandise to the firm, along with an invoice describing the contents of the shipment, the total amount due, and the terms of sale.When the firm accepts the merchandise shipped by the supplier, it in effect agrees to pay the amount due as specified by the terms of sale on the invoice. Once it has been established, trade credit becomes almost automatic and is subject to only periodic reviews by the supplier. Open account trade credit appears on the balance sheet as accounts payable.
Promissory notes are sometimes used as an alternative to the open account arrangement. When a company signs a promissory note, which specifies the amount to be paid and the due date, it is formally recognizing an obligation to repay the credit. A supplier may require a company to sign a promissory note if it questions the company's creditworthiness. Promissory notes usually appear on the balance sheet as notes payable.
Credit Terms
Credit terms, or terms of sale, specify the conditions under which a business is required to repay the credit that a supplier has extended to it. These conditions include the length and the beginning date of the credit period, the cash discount (if any) given for prompt repayment, and any special terms, such as seasonal datings.
Cost of Trade Credit
Trade credit is considered a spontaneous source of financing because it normally expands as the volume of a company's purchases increases. For example, suppose a company experiences increased demand for its products. As a result, the company increases purchases from suppliers by 20 percent from an average of $10,000 per day to an average of $12,000 per day. Assuming that these purchases are made on credit terms of "net 30" and that the company waits until the last day of the credit period to make payment, its average accounts payable outstanding (trade credit) will automatically increase by 20 percent from $300,000 ($10,000*30) to $360,000 ($12,000*30).
Because trade credit is flexible, informal, and relatively easy to obtain, it is an attractive source of financing for virtually all firms, especially new and smaller firms. To make intelligent use of trade credit, however, a firm should consider the associated costs. Unlike other sources of financing, such as bank loans and bonds, which include explicit interest charges, the cost of trade credit is not always readily apparent. It may appear to be "cost-free" because of the lack of interest charges, but this reasoning can lead to incorrect financing decisions. Obviously, someone has to bear the cost of trade credit. In extending trade credit, the supplier incurs the cost of the funds invested in accounts receivable, plus the cost of any cash discounts that are taken.
Normally, the supplier passes on all or part of these costs to its customers implicitly as part of the purchase price of the merchandise, depending on market supply and demand conditions. If a company is in a position to pay cash for purchases, it may consider trying to avoid these implicit costs by negotiating lower prices with suppliers. If the terms of sale include a cash discount, the firm must decide whether or not to take it. If the firm takes the cash discount, it forgoes the credit offered by the supplier beyond the end of the discount period. Assuming that the firm takes the cash discount and wants to make maximum use of the credit offered by suppliers, it should pay its bills on the last day of the discount period. Under these conditions, trade credit does represent a "cost-free" source of financing to the firm (assuming that no additional discounts are available if the firm pays cash on delivery or cash before delivery).
If a company forgoes the cash discount and pays bills after the end of the discount period, a definite opportunity cost of trade credit is incurred. In calculating the cost of not taking the cash discount, it is assumed that the company will make maximum use of extended trade credit by paying on the last day of the credit period. Paying after the end of the credit period, or stretching accounts payable, subjects the company to certain other costs. The annual financing cost of forgoing a cash discount is calculated using Equation 16.10. In this application, the AFC is equal to the fractional interest cost per period times the number of borrowing periods per year:Percentage discount AFC = ———————————— 100 – Percentage discount
365 Accrued Expenses and Deferred Income
Accrued expenses and deferred income are additional spontaneous sources of unsecured short-term credit.
Accrued Expenses
Accrued expenses—such as accrued wages, taxes, and interest—represent liabilities for services rendered to the firm that have not yet been paid for by the firm. As such, they constitute an interest-free source of financing.
Accrued wages represent the money a business owes to its employees.Accrued wages build up between paydays and fall to zero again at the end of the pay period, when the employees receive their paychecks. A company can increase the average amount of accrued wages by lengthening the period between paydays. For example, changing from a 2-week pay cycle to a 4 -week pay cycle would effectively double a firm's average level of accrued wages. Also, a company can increase accrued expenses by delaying the payment of sales commissions and bonuses. Legal and practical considerations, however, limit the extent to which a company can increase accrued wages in this manner.
The amounts of accrued taxes and interest a firm may accumulate is also determined by the frequency with which these expenses must be paid. For example, corporate income tax payments normally are due quarterly, and a firm can use accrued taxes as a source of funds between these payment dates. Similarly, accrued interest on a bond issue requiring semiannual interest payments can be used as a source of financing for periods as long as six months. Of course, a firm has no control over the frequency of these tax and interest payments, so the amount of financing provided by these sources depends solely on the amounts of the payments themselves.
Deferred Income
Deferred income consists of payments received for goods and services that the firm has agreed to deliver at some future date. Because these payments increase the firm's liquidity and assets—namely, cash—they constitute a source of funds. Advance payments made by customers are the primary sources of deferred income. These payments are common on large, expensive products, such as jet aircraft. Because these payments are not "earned" by the firm until delivery of the goods or services to the customers, they are recognized on the balance sheet as a liability called deferred income.Short-Term Bank Credit
Commercial banks are an important source of both secured and unsecured short-term credit. In terms of the aggregate amount of short -term financing they provide to business firms, they rank second behind trade credit. Although trade credit is a primary source of spontaneous short-term financing, bank loans represent the major source of negotiated short -term funds.
A major purpose of short-term bank loans is to meet the firm's seasonal needs for funds—such as financing the buildup of inventories and receivables. Bank loans used for this purpose are regarded as self -liquidating, because sale of the inventories and collection of the receivables are expected to generate sufficient cash flows to permit the firm to repay the loan prior to the next seasonal buildup.
When a firm obtains a short-term bank loan, it normally signs a promissory note specifying the amount of the loan, the interest rate being charged, and the due date. The loan agreement may also contain various protective covenants. Short-term bank loans appear on the balance sheet under notes payable.
The interest rate charged on a bank loan is usually related to the prime rate, which is the rate banks historically have charged on loans made to their most creditworthy, or prime, business customers. The prime rate fluctuates over time with changes in the supply of and demand for loanable funds. During the past 25 years, for instance, the prime rate ranged from as low as 4.0 percent to as high as 21.5 percent. In recent years many large, highly profitable companies have been able to borrow at less than the prime rate. Subprime borrowing is partially the result of increased competition among large banks and other suppliers of short -term financing for especially creditworthy borrowers.
As an alternative to borrowing funds in the United States, large, well -established multinational corporations can borrow short -term funds in the Eurodollar market. The interest rate in the Eurodollar market is usually related to the London Interbank Offer Rate, or LIBOR. LIBOR is the interest rate at which banks in the Eurocurrency market lend to each other. For example, large, well -established multinational corporations usually can borrow at about 0.5 percentage points over LIBOR. Because LIBOR is frequently about 1.5 or more percentage points below U.S. bank prime rates, large companies can often borrow in the Eurodollar market at subprime rates. For example, in June 2004, the LIBOR rate was 1.36 percent, compared to an average prime rate of 4.00 percent. However, the LIBOR rate tends to be more volatile over time than the prime rate. Short-term bank financing is available under three different arrangements:
Single Loans (Notes)
Businesses frequently need funds for short time periods to finance a particular undertaking. In such a case, they may request a bank loan. This type of loan is often referred to as a note. The length of this type of loan can range from 30 days to one year, with most being for 30 to 90 days.
The interest rate a bank charges on an individual loan at a given point in time depends on a number of factors, including the borrower's creditworthiness relative to prime (lowest) credit risks. The interest rate often includes a premium of 1 to 2 or more percentage points above the prime rate, depending on how the bank officer perceives the borrower's overall business and financial risk. If the borrower is in a weak financial position and has overall risk that is thought to be too high, the bank may refuse to make an unsecured loan, regardless of the interest rate.When making the loan decision, the loan officer also considers the size of the checking account balance the company maintains at the bank, the amount of other business it does with the bank, and the rates that competitive banks are charging on similar loans.
The annual financing cost of a bank loan is also a function of when the borrower must pay the interest and whether the bank requires the borrower to maintain a compensating balance. Interest Payments If the interest on a note is paid at maturity, the annual financing cost is equal to the stated annual interest rate. In the case of a discounted loan, however, the bank deducts the interest at the time the loan is made, and thus the borrower does not receive the full loan amount. In other words, the borrower pays interest on funds it does not receive, and the annual financing cost of the loan is greater than the stated annual interest rate.For example, suppose the Edgewood Flower and Gift Shop receives a 6-month (183 day) $5,000 discounted loan at a stated annual interest rate of 8 percent. The firm pays $201 interest in advance (0.08 *$5,000 *183/365) and receives only $4,799 ($5,000 *$201). Using Equation 16.8, the annual financing cost is calculated as follows:
$201 365 AFC = ——— Commercial Paper
Commercial paper consists of short -term unsecured promissory notes issued by major corporations. Only companies with good credit ratings are able to borrow funds through the sale of commercial paper. Purchasers of commercial paper include corporations with excess funds to invest, banks, insurance companies, pension funds, money market mutual funds, and other types of financial institutions. Over $1.2 trillion in commercial paper was outstanding at the end of 2003.
Large finance companies, such as General Motors Acceptance Corporation (GMAC) and CIT Financial Corporation, issue sizable amounts of commercial paper on a regular basis, selling it directly to investors like those just mentioned. Large industrial, utility, and transportation firms, as well as smaller finance companies, issue commercial paper less frequently and in smaller amounts; they sell it to dealers who, in turn, sell the commercial paper to investors. Maturities on commercial paper at the time of issue range from several days to a maximum of nine months. Companies usually do not issue commercial paper with maturities beyond nine months, because these issues must be registered with the Securities and Exchange Commission.
The size of an issue of commercial paper can range up to several hundred million dollars. It is usually sold to investors in multiples of $100,000 or more. Large issuers of commercial paper normally attempt to tailor the maturity and amounts of an issue to the needs of investors. Commercial paper represents an attractive financing source for large, financially sound firms, because interest rates on commercial paper issues tend to be below the prime lending rate. To successfully market commercial paper (and get an acceptable rating from Moody's, Standard & Poor's, or both), however, the company normally must have unused bank lines of credit equal to the amount of the issue. The primary disadvantage of this type of financing is that it is not always a reliable source of funds.
The commercial paper market is impersonal. A firm that is suddenly faced with temporary financial difficulties may find that investors are unwilling to purchase new issues of commercial paper to replace maturing issues. In addition, the amount of loanable funds available in the commercial paper market is limited to the amount of excess liquidity of the various purchasers of commercial paper. During tight money periods, enough funds may not be available to meet the aggregate needs of corporate issuers of commercial paper at reasonable rates. As a result, a company should maintain adequate lines of bank credit and recognize the risks of relying too heavily on commercial paper. Finally, a commercial paper issue usually cannot be paid off until maturity. Even if a company no longer needs the funds from a commercial paper issue, it must still pay the interest costs.
Commercial paper is sold on a discount basis; this means that the firm receives less than the stated amount of the note at issue and then pays the investor the full face amount at maturity. The annual financing cost of commercial paper depends on the maturity date of the issue and the prevailing short -term interest rates. In addition to the interest costs, borrowers also must pay a placement fee to the commercial paper dealer for arranging the sale of the issue. The annual financing cost can be computed as follows, based onInterest costs + Placement fee 365 AFC = ————————————— Accounts Receivable Loans
Accounts receivable are one of the most commonly used forms of collateral for secured shortterm borrowing. From the lender's standpoint, accounts receivable represent a desirable form of collateral, because they are relatively liquid and their value is relatively easy to recover if the borrower becomes insolvent. In addition, accounts receivable involve documents representing customer obligations rather than cumbersome physical assets. Offsetting these advantages, however, are potential difficulties. One disadvantage is that the borrower may attempt to defraud the lender by pledging nonexistent accounts.
Also, the recovery process in the event of insolvency may be hampered if the customer who owes the receivables returns the merchandise or files a claim alleging that the merchandise is defective. Finally, the administrative costs of processing the receivables can be high, particularly when a firm has a large number of invoices involving small dollar amounts. Nevertheless, many companies use accounts receivable as collateral for short-term financing by either pledging their receivables or factoring them.
Pledging Accounts Receivable
The pledging process begins with a loan agreement specifying the procedures and terms under which the lender will advance funds to the firm.When pledging accounts receivable, the firm retains title to the receivables and continues to carry them on its balance sheet.
However, the pledged status of the firm's receivables should be disclosed in a footnote to the financial statements. (Pledging is an accepted business practice, particularly with smaller businesses.) A firm that has pledged receivables as collateral is required to repay the loan, even if it is unable to collect the pledged receivables. In other words, the borrower assumes the default risk, and the lender has recourse back to the borrower. Both commercial banks and finance companies make loans secured by accounts receivable.
Once the pledging agreement has been established, the firm periodically sends the lender a group of invoices along with the loan request. Upon receipt of the customer invoices, the lender investigates the creditworthiness of the accounts to determine which are acceptable as collateral. The percentage of funds that the lender will advance against the collateral depends on the quality of the receivables and the company's financial position. The percentage normally ranges from 50 to 80 percent of the face amount of the receivables pledged. The company is then required to sign a promissory note and a security agreement, after which it receives the funds from the lender.
Most receivables loans are made on a nonnotification basis, which means the customer is not notified that the receivable has been pledged by the firm. The customer continues to make payments directly to the firm. To protect itself against possible fraud, the lender usually requires the firm to forward all customer payments in the form in which they are received. In addition, the borrower is usually subject to a periodic audit to ensure the integrity of its receivables and payments. Receivables that remain unpaid for 60 days or so must usually be replaced by the borrower.
The customer payments are used to reduce the loan balance and eventually repay the loan. Receivables loans can be a continuous source of financing for a company, however, provided that new receivables are pledged to the lender as existing accounts are collected. By periodically sending the lender new receivables, the company can maintain its collateral base and obtain a relatively constant amount of financing. Receivables loans can be an attractive source of financing for a company that does not have access to unsecured credit. As the company grows and its level of receivables increases, it can normally obtain larger receivables loans fairly easily. And, unlike line of credit agreements, receivables loans usually do not have compensating balance or "cleanup" provisions.
The annual financing cost of a loan in which receivables are pledged as collateral includes both the interest expense on the unpaid balance of the loan and the service fees charged for processing the receivables. Typically, the interest rate ranges from 2 to 5 percentage points over the prime rate, and service fees are approximately 1 to 2 percent of the amount of the pledged receivables. The services performed by the lender under a pledging agreement can include credit checking, keeping records of the pledged accounts and collections, and monitoring the agreement. This type of financing can be quite expensive for the firm.
The following example illustrates the calculation of the annual financing cost of an accounts receivable loan: Port City Plastics Corporation is considering pledging its receivables to finance a needed increase in working capital. Its commercial bank will lend 75 percent of the pledged receivables at 2 percentage points above the prime rate, which is currently 10 percent. In addition, the bank charges a service fee equal to 1 percent of the pledged receivables. Both interest payments and the service fee are payable at the end of each borrowing period. Port City's average collection period is 45 days, and it has receivables totaling $2 million that the bank has indicated are acceptable as collateral. As shown in Table 16.6, the annual financing cost for the pledged receivables is 22.8 percent.
Factoring Accounts Receivable
Factoring receivables involves the outright sale of the firm's receivables to a financial institution known as a factor. A number of so-called old-line factors, in addition to some commercial banks and finance companies (asset-based lenders), are engaged in factoring receivables.When receivables are factored, title to them is transferred to the factor, and the receivables no longer appear on the firm's balance sheet. Traditionally, the use of factoring was confined primarily to the apparel, furniture, and textile industries. In other industries, the factoring of receivables was considered an indication of poor financial health. Today, factoring seems to be gaining increased acceptance in other industries.
The factoring process begins with an agreement that specifies the procedures for factoring the receivables and the terms under which the factor will advance funds to the firm. Under the normal factoring arrangement, the firm sends the customer order to the factor for credit checking and approval before filling it. The factor maintains a credit department to perform the credit checking and collection functions. Once the factor decides that the customer is an acceptable risk and agrees to purchase the receivable, the firm ships the order to the customer. The customer is usually notified that its account has been sold and is instructed to make payments directly to the factor.
Cost of Pledging Receivables for Port City
Most factoring of receivables is done on a nonrecourse basis; in other words, the factor assumes the risk of default.26 If the factor refuses to purchase a given receivable, the firm still can ship the order to the customer and assume the default risk itself, but this receivable does not provide any collateral for additional credit.
In the typical factoring agreement, the firm receives payment from the factor at the normal collection or due date of the factored accounts; this is called maturity factoring. If the firm wants to receive the funds prior to this date, it can usually obtain an advance from the factor; this is referred to as advance factoring. Therefore, in addition to credit checking, collecting receivables, and bearing default risk, the factor also performs a lending function and assesses specific charges for each service provided. The maximum advance the firm can obtain from the factor is limited to the amount of factored receivables less the factoring commission, interest expense, and reserve that the factor withholds to cover any returns or allowances by customers. The reserve is usually 5 to 10 percent of the factored receivables and is paid to the firm after the factor collects the receivables.
The factor charges a factoring commission, or service fee, of 1 to 3 percent of the factored receivables to cover the costs of credit checking, collection, and bad-debt losses. The rate charged depends on the total volume of the receivables, the size of the individual receivables, and the default risk involved. The factor normally charges an interest rate of 2 to 5 percentage points over the prime rate on advances to the firm. These costs are somewhat offset by a number of internal savings that a business can realize through factoring its receivables. A company that factors all its receivables does not need a credit department and does not have to incur the administrative and clerical costs of credit investigation and collection or the losses on uncollected accounts.
In addition, the factor may be able to control losses better than a credit department in a small- or medium-size company due to its greater experience in credit evaluation. Thus, although factoring receivables may be a more costly form of credit than unsecured borrowing, the net cost may be below the stated factoring commission and interest rates because of credit department and bad-debt loss savings. For example, the Masterson Apparel Company is considering an advance factoring agreement because of its weak financial position and because of the large degree of credit risk inherent in its business. The company primarily sells large quantities of apparel to a relatively small number of retailers, and if even one retailer does not pay, the company could experience severe cash flow problems. By factoring, Masterson transfers the credit risk to the factor, Partners Credit Corporation, an asset-based lender.
Partners requires a 10 percent reserve for returns and allowances, charges a 2 percent factoring commission, and will advance Masterson funds at an annual interest rate of 4 percentage points over prime.Assume the prime rate is 10 percent. Factoring receivables will allow the company to eliminate its credit department and save about $2,000 a month in administrative and clerical costs. Factoring will also eliminate baddebt losses, which average about $6,000 a month.Masterson's average collection period is 60 days, and its average level of receivables is $1 million. In, the amount of funds Masterson can borrow from the factor and the annual financing cost of these funds are calculated. As the table shows, Masterson can obtain an advance of $859,748, and the annual financing cost is 28.5 percent before considering cost savings and elimination of bad-debt losses. After considering credit department savings and reductions in bad-debt losses, the annual financing cost drops to 17.2 percent.
Masterson can compare the cost of this factoring arrangement with the cost of other sources of funds in deciding whether or not to factor its receivables. This example calculates the factoring cost for a single 60-day period. In practice, if Masterson did enter into a factoring agreement, the agreement would most likely become a continuous procedure.Inventory Loans
Inventories are another commonly used form of collateral for secured short-term loans. They represent a flexible source of financing since additional funds can be obtained as the firm's sales and inventories expand. Like receivables, many types of inventories are fairly liquid. Therefore, lenders consider them a desirable form of collateral. When judging whether a firm's inventory would be suitable collateral for a loan, the primary considerations of the lender are the type, physical characteristics, identifiability, liquidity, and marketability of the inventory.
Cost of Factoring Receivables for
Firms hold three types of inventories: raw materials, work-in-process, and finished goods. Normally, only raw materials and finished goods are considered acceptable as security for a loan. The physical characteristic with which lenders are most concerned is the item's perishability. Inventory subject to significant physical deterioration over time is usually not suitable as collateral.
Inventory items also should be easily identifiable by means of serial numbers or inventory control numbers; this helps protect the lender against possible fraud and also aids the lender in establishing a valid title claim to the collateral if the borrower becomes insolvent and defaults on the loan. The ease with which the inventory can be liquidated and the stability of its market price are other important considerations. In the event that the borrower defaults, the lender wants to be able to take possession, sell the collateral, and recover the full amount owed with minimal expense and difficulty.
Both commercial banks and asset-based lenders make inventory loans. The percentage of funds that the lender will advance against the inventory's book value ranges from about 50 to 80 percent and depends on the inventory's characteristics. Advances near the upper end of this range are normally made only for inventories that are standardized, nonperishable, easily identified, and readily marketable. To receive an inventory loan, the borrower must sign both a promissory note and a security agreement describing the inventory that will serve as collateral.
In making a loan secured with inventories, the lender can either allow the borrower to hold the collateral or require that it be held by a third party. If the borrower holds the collateral, the loan may be made under a floating lien or trust receipt arrangement. If a third party is employed to hold the collateral, either a terminal warehouse or a field warehouse financing arrangement can be used.
Floating Liens
Under a floating lien arrangement, the lender receives a security interest or general claim on all of the firm's inventory; this may include both present and future inventory. This type of agreement is often employed when the average value of the inventory items is small, the inventory turns over frequently, or both. Specific items are not identified. Thus, a floating lien does not offer the lender much protection against losses from fraud or bankruptcy. As a result, most lenders will not advance a very high percentage of funds against the book value of the borrower's inventory.
Trust Receipts
A trust receipt is a security agreement under which the firm holds the inventory and proceeds from the sale in trust for the lender.Whenever a portion of the inventory is sold, the firm is required to immediately forward the proceeds to the lender; these are then used to reduce the loan balance.
Some companies engage in inventory financing on a continuing basis. In these cases, a new security agreement is drawn up periodically, and the lender advances the company additional funds using recently purchased inventories as collateral. All inventory items under a trust receipt arrangement must be readily identified by serial number or inventory code number. The lender makes periodic, unannounced inspections of the inventory to make sure that the firm has the collateral and has not withheld payment for inventory that has been sold.
Businesses that must have their inventories available for sale on their premises, such as automobile and appliance dealers, frequently engage in trust receipt financing, also known as floor planning. Many "captive" finance companies that are subsidiaries of manufacturers, such as General Motors Acceptance Corporation (GMAC), engage in floor planning for their dealers.
Terminal Warehouse and Field Warehouse
Financing Arrangements
Under a terminal warehouse financing arrangement, the inventory being used as loan collateral is stored in a bonded warehouse operated by a public warehousing company. When the inventory is delivered to the warehouse, the warehouse company issues a warehouse receipt listing the specific items received by serial or lot number. The warehouse receipt is forwarded to the lender, who then advances funds to the borrower. Holding the warehouse receipt gives the lender a security interest in the inventory. Because the warehouse company will release the stored inventory to the firm only when authorized to do so by the holder of the warehouse receipt, the lender is able to exercise control over the collateral. As the firm repays the loan, the lender authorizes the warehouse company to release appropriate amounts of the inventory to the firm.
Under a field warehouse financing agreement, the inventory that serves as collateral for a loan is segregated from the firm's other inventory and stored on its premises under the control of a field warehouse company. The field warehouse company issues a warehouse receipt, and the lender advances funds to the firm. The field warehouse releases inventory to the firm only when authorized to do so by the lender. Although terminal warehouse and field warehouse financing arrangements provide the lender with more control over the collateral than it has when the borrower holds the inventory, fraud or negligence on the part of the warehouse company can result in losses for the lender.
The fees charged by the warehouse company make this type of financing more expensive than floating lien or trust receipt loans. In a terminal warehouse arrangement, the firm incurs storage charges, in addition to fees for transporting the inventory to and from the public warehouse. In a field warehouse arrangement, the firm normally has to pay an installation charge, a fixed operating charge based on the overall size of the warehousing operation, and a monthly storage charge based on the value of the inventory in the field warehouse.
Overall warehousing fees are generally 1 to 3 percent of the inventory value. The total cost of an inventory loan includes the service fee charged by the lender and the warehousing fee charged by the warehousing company, plus the interest on the funds advanced by the lender. Any internal savings in inventory handling and storage costs that result when the inventory is held by a warehouse company are deducted in computing the cost of the loan.
Foreign Receivables Financinga
Small- and medium-size U.S. businesses that sell on credit to customers in foreign countries are faced with additional problems in obtaining loans on these receivables. Because of low profit margins and unfamiliarity with international markets, bank financing of these receivables is often difficult. For example, if a commercial bank does advance funds on the foreign receivables, it may want the seller to use its U.S. assets as additional collateral for the loan.
Alternatively, factors will finance foreign receivables that are insured by the Export-Import Bank.The factor will advance about 85 percent of the amount of the receivables and then remit the remainder, less fees of 1.5 to 3 percent, after the foreign customer's payment is received. Another alternative source of receivables financing is a forfait company, such as London Forfaiting, which will advance funds to the seller before they collect from the buyer. Forfaiters usually want the sales contract guaranteed by a foreign bank or government. Finally, a trading company can be used to obtain financing. The trading company will take title to the goods and arrange shipment to the foreign buyer. Such companies work with sales contracts that are guaranteed or insured by programs of U.S. and foreign governments.
Generally,U.S.exporters that require receivables financing should expect to pay in the range of 2 to 3 percent of the amount of the transaction. a See Bill Holstein,"Exporting: Congratulations Exporter! Now About Getting Paid . . ." Business Week (January 17, 1994): 98. tory, fraud or negligence on the part of the warehouse company can result in losses for the lender. The fees charged by the warehouse company make this type of financing more expensive than floating lien or trust receipt loans. In a terminal warehouse arrangement, the firm incurs storage charges, in addition to fees for transporting the inventory to and from the public warehouse.
In a field warehouse arrangement, the firm normally has to pay an installation charge, a fixed operating charge based on the overall size of the warehousing operation, and a monthly storage charge based on the value of the inventory in the field warehouse. Overall warehousing fees are generally 1 to 3 percent of the inventory value. The total cost of an inventory loan includes the service fee charged by the lender and the warehousing fee charged by the warehousing company, plus the interest on the funds advanced by the lender. Any internal savings in inventory handling and storage costs that result when the inventory is held by a warehouse company are deducted in computing the cost of the loan.


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Skip to comments.Yes, Paul Ryan Spoke the Truth About Obama's Fiscal Record at the Republican Convention
Posted on 08/30/2012 7:30:55 AM PDT by Qbert
Progressive bloggers and TV personalities are up in arms about Paul Ryans speech at the Republican National Convention last night. Several of their accusations revolve around Paul Ryans own fiscal record, and his description of President Obamas. I asked my liberal friends on Twitter to send me an itemized list of Ryans alleged lies, and they kindly obliged. So far, Ryan appears to have the better of the argument.
Dave Weigel of Slate compiled a useful list. (For a longer one, visit ThinkProgress.) Wrote Weigel, Ryan plowed through one of the more impressive strings of whoppers weve seen at this level, wrote Weigel. Here are his complaints, in order of importance.
Charge #1: Paul Ryan accused Obama of cutting Medicare by $716 billion, but Ryans own budget preserved those cuts.
APOTHEFACT JUDGMENT: Ryan is correct. Ryan makes the appropriate distinction between improving Medicares solvency and cutting its spending to fund spending elsewhere.
Charge #2: Paul Ryan criticized Obama for ignoring the recommendations of the Simpson-Bowles deficit commission. But Ryan voted against those recommendations himself.
Its true that Paul Ryan voted against the Simpson-Bowles recommendations. He did so because Simpson-Bowles raised taxes while doing little to nothing about health-care spending, the biggest driver of growing deficits. However, by rejecting Simpson-Bowles, Ryan felt morally obligated to put forth his own plan, and did soseveral times, in the form of his Path to Prosperity and his 2011 and 2012 House budget resolutions.
By contrast, President Obama scuttled a bipartisan Congressional deal to achieve long-term fiscal reform.
APOTHEFACT JUDGMENT: Ryan is correct. Ryans credibility on deficit reduction is on the record, and has been endorsed by prominent Democrats. By contrast, Obamas FY 2013 budget didnt garner a single vote in Congress.
(Excerpt) Read more at forbes.com ...
Yes, the left is spinning like that proverbial Maytag on crack that we keep hearing about. That's a sure sign they feel the damage.
Notice who we are NOT hearing from? Debbie WS, Axe, Burton, Messina, Stephanie Cutter,,,where did all the lying liars go?
It's frightening on every level for a woman if Mitt Romeny and Paul Ryan get elected. We might as well move to Afghanistan. They are planning on incorporating a constitutional ban on abortions in almost ALL cases, including rape and incest. How truly disgusting is that? So, they are saying that if a woman gets raped they are going to force her to have the baby if one is conceived?
I highly doubt it, but I'd like some other input. Thanks.
It's like Obama took the National Credit Card and immediately ran to the mall with it and hasn't stopped charging things to it.
I'd start by asking your left friend for her source.
And besides that, the Simpson-Bowles plan was the one that emerged, so the greater point is Obama didn't bother to push for its implementation.
These rebuttals are preaching to the choir, never traveling beyond the hyper-political conservative blog-o-sphere. The average news consumer, who just glances at headlines and accepts them as fact, will believe them without question since it fits so neatly into the convenient narrative the LSM has been crafting for the last 4 years.
This link should work:
Ask her how they are going to do that. They can't pass a constitutional amendment by themselves.
First, tell your ignorant friend president's don't get to change the Constitution at their whim. If they could, our current boy-king would have dispensed with that inconvenient document 4 years ago.
To do what she suggests would require a Constitutional ammendment. The Constitution provides that an amendment may be proposed either by the Congress with a two-thirds majority vote in both the House of Representatives and the Senate or by a constitutional convention called for by two-thirds of the State legislatures. None of the 27 amendments to the Constitution have been proposed by constitutional convention.
So the Congress proposes an amendment in the form of a joint resolution. Since the President does not have a constitutional role in the amendment process, the joint resolution does not go to the White House for signature or approval. A proposed amendment becomes part of the Constitution as soon as it is ratified by three-fourths of the States (38 of 50 States).
Basically your dumb-assed friend needs to grow up and learn how her government actually works. Only then will she be capable of rejecting the hysterical hyperbole constantly spewed by the unhinged commies. Or she can go spend a year in Afghanistan - either tack will gain her a greater appreciation for her sorry life here in America.
"Doesn't matter. The story that Ryan lied is out on the AP feed, picked up by Yahoo, MSN, and every other lazy-assed "news" organization then published far and wide, in both print and electrons... These rebuttals are preaching to the choir, never traveling beyond the hyper-political conservative blog-o-sphere. The average news consumer, who just glances at headlines and accepts them as fact, will believe them without question since it fits so neatly into the convenient narrative the LSM has been crafting for the last 4 years."
Then your job- and our job- is to counter the lies. We're not going to change the minds of the narcissistic, hardcore leftists- but open-minded people will listen and can be swayed. (I know this from personal experience- it surprised me, in fact).
Hysterical liberal females don't understand how laws and policies are made, or choose not to understand.
At the time the Supreme Court upheld the ban on partial birth abortion, that brilliant liberal mind, Rosie O'Donnell, said that it's as if Roe vs. Wade never happened. Of course that's far from true, but that's what Rosie thinks.
And another great liberal thinker, Roseanne Barr, was similarly shocked at the court upholding the ban on partial birth abortion. She said, what's next, they are going to take away women's right to vote?
Of course, we all know Roseanne Barr's right to vote is guaranteed by the 19th amendment, but, a hysterical mind equates any limits of any kind on abortion with dismantling ALL rights of women under the law. It's quite a stretch, but that's how the most extreme liberals think.
Oh, I did.
Id start by asking your left friend for her source.
I did that, too.....no answer on both. Typical.
Oh yeah...
E-mails reveal Post reporter savaging conservatives, rooting for Democrats
WaPos Dave Weigel Resigns After More Journolist E-Mails Surface
Why I Cant Take Dave Weigel Seriously
Sarah Palin's strange, unprofessional and paranoid grudge
Stalker, Joe McGinniss Interviewed by His Biggest Fan, Dave Weigel
Well, no argument there! We all touch as many as we can with reasoned arguments and a healthy dose of common sense. I've had the same experience as you, enjoying some success in dispelling the nonsense to my less-political friends and aquaintances. But I have no illusion that many will slip through the cracks.
I'm simply pointing out how daunting the task is given the impending onslaught of disinformation still to come.
That's in the official Republican party platform.
I must admit I had not heard that particular proverb but it's definitely a humorous one.
The Janesville plant is not closed. It's just that no one is working there and no vehicles are being produced...but it's not close!
Don't waste your time on her garbage and dump her as a friend. She is your enemy and is spewing nonsense in an attempt to completely eliminate your individual liberty.
Ask her how a President "institutes a constitutional ban" on anything? If she is referencing a constitutional ammendment, then it would require a 2/3rds approval in both houses and then ratificatoin by 2/3rds of the states.
Just explain how very difficult it is to amend the Constitution. Does she really think three-fifths of the states would vote for this?
Erskine Bowles Paul Ryan Is Amazing
Liberals always decry violence when it's convenient to them. An abortion after a rape is just violence against another innocent. A rape victim knows first hand the horrors of violence perpetrated against a innocent person, and yet rather than promoting empathy, mercy, or compassion, the left says "pay the violence forward". "That hurt you feel won't go away until you hurt someone in response."
Liberals are such compassionate people.
Let me add one more thing, and this one you can actually use as a response to your left friend.
After you let her know about the process to ammend the const, then you can tell her that there is a way to ban abortion immediately. All it takes is creating a 15 member board to approve all medical procedures, making sure the members are not elected and instead appointed by the President. Then all we have to do is make sure that panel is stacked with 8 members that are pro-life. After that, the board can simply deny abortion as a medical procedure.
Ooops, her Obamacare did that! Now all we need is to pack the board that is scheduled to be fully implemented next year.
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subset: commoncrawl


text:
Sheraton Dubai Creek Hotel & Towers
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Historical Traveler Reviews Sheraton Dubai Creek Hotel & Towers
Another typical Sheraton
Stayed in the Sheraton Dubai Creek for three nights in January 2006. The big advantage: You know what you get. It's a typical Sheraton hotel, neither stunning nor disappointing. The hotel is located directly at the Dubai Creek, not too far away from the airport. Downtown Deira with Gold Souk and the Arabian markets are approximately two kilometres to walk. The staff is friendly, the rooms are spacious, but not very cheap. Internet services are ridiculously expensive. You should ask for rooms at the upper floors and if possible on the Creek side. The traffic on the Baniyas Road is massive and extremely noisy. There is not much to do nearby the hotel, except the Creek tours. For everything else you need to have a car or hop in a taxi (if you have a rental car: valet parking is for free!). There are three restaurants in the hotel: The Italian is pretty much okay, the Indian restaurant is really good. The downside: Both are not cheap, food per person with drinks will not be below 25 Euros. There is a Health Club with a rather spacious gym, whith several bikes, new running machines and a weight lifting section. The pool is small, but well serviced and with a lot of sun, especially during the afternoon.
Finally, it depends on what you want: Bur Dubai on the other side of the Creek is the place to be, where most of the nightlife takes place. If you will spent most of your time at the beach, go for another hotel nearer the coastline and on the other side of the Dubai Creek, where you'll find more options for nightlife and dining.
Not quite a 5 Star Experience but pretty close
Stayed at the 5 Star Sheraton Dubai Creek and Towers with my wife between the 28th Nov and 7th Dec, had prevously stayed at the Metropolitan Palace a couple of times and also the Metropolitan Hotel on SZR, found the Sheraton to be as good if not better than the Metropolitan Palace, reports of the pool being small were correct but the pool area itself was good and the drinks/food service was good if not a little pricey, free shuttle to the beach was good although the trafic situation is worse than ever and the Sheraton Beach Resort is fast being overtaken by the huge construction sites behind it but once you are on the beach the noise from the construction site is not a problem, all in all the Sheraton Dubai Creek is a nice hotel with very friendly staff, all I would say is try to get a Creek View as the road View rooms have a lot of trafic noise.
Sorry won't go back...
After the Hilton Dubai creek this was a bit of a let down.
It's a very big commercial set up with its business clients coming first. We had a comfortable room on the first floor (5 upwards are for business only) with a nice view of the creek. However, all the rooms come out onto a large entrance foyer which is on the go 24/7 AND there is a water feature which is very noisy that doesn't get switched off until very late. Add on top of that a pianist that plays each evening and your tranquillity is spoilt.
The breakfast is buffet style. There is plenty of choice and its good quality. Our experience of this aspect was however marred by the young lady who greeted us, she quickly became engaged in a telephone booking for lunch and dismissed us to an indoor table despite out request to sit outside with a chance to get away from any smokers. The staff on the following days were more obliging and outside is much more palatable..
Sorry won't be staying again its back to the Creek Hilton across the road for us. Very much a business hotel, but don't treat tourists as second class.
Impressive Hotel
We have recently returned from Dubai having stayed at the Sheraton.Our first impressions of the hotel was how impressive the lobby was. All of the staff at the hotel were very nice and helpful. The hotel itself is located in a good area not too far from the airport and not too far away form the shopping malls. Taxis's are very cheap but found that the taxis drivers don't really speak to you much and don't return your change if you don't ask for it back. The breakfast menu was excellent so much choice they catered for every nationality.You can choose to eat inside or outside in the sun. The swimming pool is on the small side but it was lovely and cool. If you want to phone home it's best to purchase a phone card. Lovely hotel, lovely country, but remember that October was the month of Ramadan and there are restrictions such as shops closing at about 1.00 in the afternoon.
Nice but very noisey
The hotel is beautiful but there were problems:
They will charge you extra if you try to check-in before 1500.
Make sure you get a room on a high floor. I was on the third floor and had to listen to jack-hammers and loud construction coming from the basement of the hotel. The management said that the work was on the road, which is definitely under construction, but there were no workers on the street when the hammering started every morning at 6am and ended at 4pm.
Internet is available in the rooms if you have a laptop but the rates are extremely high. Almost $35 per day. There is an Internet Cafe across the street if you can find a way through all the road construction.
I participated in the Iftar buffet (breaking of Ramadan Fast) and the food and selection were excellent but not worth the $27 per person price.
Overall, I was not happy with this hotel and will probably not stay here again.
Yes, it is very good.
Had connecting rooms on the second floor with astounding creek views.
The hotel has an impressive entrance and is very formal. The rooms were clean, big and the views breathtaking. I was there for nine nights and enjoyed every moment, as did my wife and two children (12 and 14). The pool area is quiet and if you want party activities you are in the wrong hotel. Sedate and civilised would be my description. Yes it was Ramadan and I understand the last reporters comments re Iftar, but all of the other hotels are the same. I have visited the beach hotels and this in my opinion is better, without the cost of beach frontage.
The door staff and valet parkers were all nice guys, give them a little respect, as so many others do not, plus a small tip and they cannot do enough to assist.
I have watched so many people treat hotel employees as the lowest of the low, being rude to them and then read the comments within this site....
I would stay at this hotel again without hesitation. Very very good
Good hotel and location
we stayed in this hotel and i found it to be very good indeed. we arrived from a night flight and its true what another reviewer says, that you will be charged if you want the room before 3, i payed around £50 but we were so tired it was worth it and we got upgraded to a tower room. the hotel is in a great location we found, it was clean and tidy and the staff are very friendly. rooms were cleaned everyday and you get more towels than i have ever had in a hotel before! the only minor complaint i had was that it was ramadam when we were there and when we were sunbathing around the pool, about 2 in the afternoon they started putting the tables out for the iftar that night and you did feel as though you were imposing. on all very nice and if you want to know anymore, please mail me.
Staff rude, charge 200% for the room for check ins before 1500 hours.
This hotel has good views from the restaurant, but the male staff try to second guess you, dont let you finish your sentences and jerk you around.
Really annoying that the greedy management has put the check-in time at 1500 hours and then charge you 100% more for checking in at any time prior to 1500 hours. I paid US$700 for the first day that I was there after which US$350 per day. I vowed never to stay again.
They are arrogant in that they have a high occupancy, and do not care to entice frequent visitors to Dubai.
The rooms are of variable quality and my associate informed that the more times you stay there, the lower the quality of the room that they give you.
They failed to follow through on a wake up call and they forgot to send a car to collect me from the airport.
Advice, try another hotel
Generally Bad
Just returned from staying at Sheraton in Dubai Creek. Not recommended for a tourist to stay here. The location of the hotel itself is not great nor is it the worst place either. However, the facilities and services are pretty poor. There is no concergie therefore difficult to find information about things to do in the area. We stayed as a Starwood Preferred Guest and our reservation was screwed up. The restaurants in the hotel are poor with one indian and one Italian restaurant which covers the buffet breakfast. Most of the food served from the Italian restaurant menu is microwave taste! More a business person's hotel on a very temporary stay. Its got a gym with more multi equipment but small overall; a small health centre but no spa treatments only massage. Pool pretty small also with a wall blocking the view of the Creek, but to create privacy i guess. If you want something on the beach, get a hotel on Jumeriah Beach, alternatively the Hilton Dubai Creek had good reports. Must give credit to the staff however who are very friendly.
Top Drawer
Smart Hotel, rooms, reception area, views of the Creek were just dandy. We were only there for one night on business but cannot fault the place. The only downside for holiday makers might be the size of the pool area. As it gets so very hot, you don't want to hang around outside for too long anyway.
TripAdvisor Reviews Sheraton Dubai Creek Hotel & Towers
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Neoseeker : Movies : Documentary : At the Edge of the World
At the Edge of the World
- Directed by Dan Stone
===Story=== Illegal hunting of certain whales species by Japanese hunting vessels has driven them to the edge of extinction. This documentary follows Canadian activist Paul Watson and his crew aboard the Sea Shepard that work to battle against this illegal activity. With a variety of tools designed to prevent hunters from endangering the whales even further, the real question is how far these people will go to safeguard the sea life.
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Theatrical Release North America Aug 28, 2009
Ratings North America PG


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