Crediting rate and crediting score are closely related concepts that can serve as indicators of an organization’s financial health. According to Melicher and Norton (2019), the crediting rate indicates an expected likelihood of a borrower missing payments or defaulting on loans, mortgages, or bonds. Consequently, a crediting score represents a borrower’s overall trustworthiness based on an individual’s or organization’s credit history and public records, such as bankruptcies and tax liens (Melicher & Norton, 2019). Given that a corporation will be acquiring all debts and liabilities of the target company, the crediting rate and score should be considered significant factors during the evaluation process. A preference should be given to the target with the most trustworthy credit score.
Considering that funds for the acquisition must be raised immediately, it would be reasonable for an acquirer to borrow on a short-term basis. Asset acquisition is a temporary business goal; in this regard, a short-term loan would be more suitable for meeting a capital business need (Corporate Finance Institute [CFI], 2022). In addition, short-term borrowing would offer the acquirer an advantage of flexibility, as the company would be able to finance its business needs without the excess costs of long-term borrowing (Melicher & Norton, 2019). Therefore, short-term borrowing would be a preferable course of action in a given scenario.
Inflation rates will affect the purchase since the company would have to take out a bank loan to fund the acquisition. According to Heakal (2022), inflation affects interest rates, meaning that high inflation leads to an increase in interest rate levels as lenders try to compensate for losses stemming from the decreasing purchasing power of the money. In this regard, inflation rates may become a significant factor affecting the total cost of the acquisition deal.
Yield curves and term structure of interest rates are essentially the same. According to the Federal Reserve Board (2019), yield curves show the relationship between the remaining time-to-maturity of debt security and the yield on those securities. For instance, a normal curve demonstrates an increase in bond maturity over time, meaning strong economic growth and relatively high inflation in the future (Tarver, 2020). As such, yield curve analysis may serve for inflation and interest rate prediction, providing valuable information for choosing the right moment for the acquisition deal.
A new technology of lemonade conversion into oil would eventually lower gas prices. However, the process of its development and wide implementation would demand significant capital investments in research, development, and equipment. Consequently, the companies interested in the new technology would have to take out loans in order to fund the new oil and gas production process. If the demand for borrowing to invest in a promising technology becomes higher than the available funds for lending, the interest rates offered by the lenders will increase.
The financial health of the potential acquisition can be assessed through several categories of financial ratios. In particular, liquidity ratios indicate the company’s ability to meet short-term obligations to its creditors. The asset management ratios demonstrate the company’s efficiency in sales generation, indicating its profitability. The financial leverage ratios indicate the extent of a company’s dependence on debt to finance its assets and meet debt payment obligations. Finally, the profitability ratios demonstrate a company’s ability to generate sales, and the market value ratios allow potential investors to gauge its value (Melicher & Norton, 2019). Combining these ratios allows the corporation to draw a comprehensive picture of the potential acquisition target’s financial health.
References
Corporate Finance Institute. (2022). Short term loan. Web.
Federal Reserve Board. (2019). Yield curve models and data. Web.
Heakal, R. (2022). Forces that cause changes in interest rates. Investopedia. Web.
Melicher, R. W., & Norton, E. A. (2019). Introduction to finance: Markets, investments, and financial management (17th ed.). Wiley.
Tarver, E. (2020). What is the difference between term structure and a yield curve? Investopedia. Web.