P. 1
bma9e30.ppt

bma9e30.ppt

|Views: 0|Likes:
Corporate Finance
Corporate Finance

More info:

Categories:Types, Business/Law
Published by: Hafiz Mahmood Ul Hassan on Mar 08, 2013
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PPT, PDF, TXT or read online from Scribd
See more
See less

09/10/2015

pdf

text

original

Principles of Corporate Finance

Ninth Edition

Chapter 30
Working Capital Management

Slides by Matthew Will

McGraw Hill/Irwin

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

30- 2

Topics Covered
 Inventories  Credit Management  Cash  Marketable Securities

McGraw Hill/Irwin

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

30- 3

Working Capital
Current assets and liabilities for U.S. manufacturing firms (2nd qtr. 2006)…$ billions
Currenty Assets Cash Other shirt-term financial investments Accounts receivable Inventories Other current asets Total 265 199 634 570 311 1979 Current Liabilities Short-term loans Accounts payable Accrued income taxes Current payments due on long-term debt Other current liabilities Total 138 436 65 104 723 1466

Net working capital (current assets-current liabilities) = $1979-1466=$513 billion.
McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

Inc. All rights reserved .4 Inventory Management  Components of Inventory – Raw materials – Work in process – Finished goods  Goal = Minimize amount of cash tied up in inventory  Tools used to minimize inventory – Just-in-time – Lean manufacturing McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.30.

However.5 Inventories As the firm increases its order size. an increase in order size also increases the average amount in inventory.30. McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. All rights reserved . so that the carrying cost of inventory rises. Inc. The trick is to strike a balance between these two costs. the number of orders falls and therefore the order costs decline.

thousands of units Inventory 30 Average Inventory 0 3 6 Weeks 9 12 McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.6 Managing Inventories 60 Inventory. All rights reserved . Inc.30.

7 Inventories Determination of optimal order size Inventory costs. Inc.30. All rights reserved . dollars Total costs Carrying costs Total order costs Optimal order size Order size McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.

8 Inventories Economic Order Quantity . All rights reserved .30. Economic Order Quantity = 2 x annual sales x cost per order carrying cost McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.Order size that minimizes total inventory costs. Inc.

9 Inventories Just-in-time inventory management Managing inventories of cash Upper limit Cash Balance Return point Lower limit Time McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc. All rights reserved .30.

Conversely. Initial cash balance = 2 x annual cash outflows x cost per sale of securities interest rate McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc.10 Inventories  The optimal amount of short term securities sold to raise cash will be higher when annual cash outflows are higher and when the cost per sale of securities is higher. All rights reserved . the initial cash balance falls when the interest is higher.30.

All rights reserved . Inc.30.11 Working Capital Net Working Capital . McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Carrying Costs .Current assets minus current liabilities. Often called working capital. Cash Conversion Cycle .Costs incurred from shortages in current assets. Shortage Costs .Period between firm’s payment for materials and collection on its sales. including opportunity cost of capital.Costs of maintaining current assets.

5/10 net 30 5 .12 Terms of Sale Terms of Sale .number of days before payment is due McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.30.Credit. discount. Inc. All rights reserved .number of days that the discount is available net 30 . Example .percent discount for early payment 10 . and payment terms offered on a sale.

Inc. All rights reserved .30. of course.1 Copyright © 2008 by The McGraw-Hill Companies. It saves cash today but will have to pay later.  We can calculate the implicit cost of this loan Effective annual rate = 1 + McGraw Hill/Irwin ( discount discounted price ) 365 / extra days credit . is an implicit loan from the supplier. This.13 Terms of Sale  A firm that buys on credit is in effect borrowing from its supplier.

14 Terms of Sale Example . or 45. what is the implied interest rate on the credit given? Effective annual rate  1+  1 + McGraw Hill/Irwin  365/extra days credit discount discounted price 5 365/50 95  -1  .30.4% Copyright © 2008 by The McGraw-Hill Companies.1 = .On a $100 sale.454. with terms 5/10 net 60. All rights reserved . Inc.

Inc. All rights reserved .15 Credit Agreements  Terminology – – – – – – – – – open account promissory note commercial draft sight draft time draft trade acceptance banker’s acceptance irrevocable letter of credit conditional sale McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.30.

Inc. All rights reserved .16 Credit Analysis Numerical Credit Scoring categories – – – – – The customer’s character The customer’s capacity to pay The customer’s capital The collateral provided by the customer The condition of the customer’s business McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.30.

17 Credit Analysis Credit Analysis . such as Dun & Bradstreet provide reports on the credit worthiness of a potential customer. All rights reserved .Procedure to determine the likelihood a customer will pay its bills.30. McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc.  Credit agencies.  Financial ratios can be calculated to help determine a customer’s ability to pay its bills.

18 The Credit Decision Credit Policy .  Denying credit guarantees neither profit or loss.  Extending credit gives you the probability of making a profit. There is still a chance of default.Standards set to determine the amount and nature of credit to extend to customers.30. McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc. All rights reserved . not the guarantee. Credit Scoring – What your lender won’t tell tell you.

Inc. All rights reserved .30.Cost Offer credit Customer defaults = 1-p Payoff = .19 The Credit Decision The credit decision and its probable payoffs Customer pays = p Payoff = Rev .Cost Refuse credit Payoff = 0 McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.

20 The Credit Decision  Based on the probability of payoffs. Inc.Cost) .(1 . All rights reserved . the expected profit can be expressed as: p x PV(Rev .30.p) x (PV(cost) The break even probability of collection is: PV(Cost) p = PV(Rev) McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.

All rights reserved . Inc. McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.Classification of accounts receivable by time outstanding.30.21 Collection Policy Collection Policy . Aging Schedule .Procedures to collect and monitor receivables.

000 200.30.200.000.000 Rest of world 600.000 Europe Americas 400.000 0 1999 2000 2001 2002 2003 2004 2005 2006 McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc.000 Factoring volume (millions) 1. All rights reserved .000 800.22 Factoring Total factoring volume measured in millions of Euros 1.

Inc.3 months Total Owed Name 1 month 3 months A 10.23 Collection Policy Sample aging schedule for accounts receivable Customer' s Less than More than 1 .000 3.000 $40. All rights reserved .000 15.30.000 $298.000 McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.000 * * * * * * * * * * * * * * * * * * Z 5.000 $15.2 months 2 .000 4.000 0 0 0 10.000 Total $200.000 0 0 11.000 $43.000 B 8.000 6.000 30.

Inc. All rights reserved .30.24 Cash Cash does not pay interest – Move money from cash accounts into short term securities – “Sweep programs” – MMDAs – Concentration banking – Lock-box system McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.

30. All rights reserved Switzerland Sweden France USA Italy . Percentage of total by payment type for 2004. Inc. 100% 80% 60% 40% 20% 0% Direct debits Credit transfers Credit/debit cards Checks UK Canada Germany Netherlands McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.25 Cash How purchases are paid.

30. Inc. All rights reserved .26 Cash  Electronic Funds Transfer (EFT)  Automated Clearinghouse (ACH)  2005 ACH transaction volume = $31.1 trillion  International cash management  Compensating balances McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.

Inc. All rights reserved .27 Payment Methods 120 100 % of firms using 80 60 Receive payments Make payments 40 20 0 Direct payments Direct deposits Wire transfers McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.30.

285 7.548 McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.034 4.008 383 31.242 364 4.30. All rights reserved .605 4.28 Marketable Securities Microsoft 2006 cash investments Investment Money market mutual funds Commercial paper Certificates of deposit US Govt and agency securities Foreign govt bonds Mortgage backed securities Corporate notes and bonds Municipal securities Other Total Amount $723 million 3. Inc.904 6.

S. government Discount Federal agency FHLB. All rights reserved ." benchmark bills and Sallie Mae. etc. "Fannie Mae.30. (VRDBs) etc. universities. rate demand bond states. etc. school municipal notes districts. 3 months. Tax-exempt variableMunicipalities. 3 months to 1 year 10-40 years Good secondary market Good secondary market Usually interestbearing with interest at maturity Variable interest rate McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. discount notes sold through dealers Tax-anticipation notes (TANs). or 6 months Marketability Excellent secondary market Very good secondary market Basis for Calculating Interest Comments Treasury bills U.29 Money Market Investments Investment Borrower MATURITIES When Issued 4 weeks. days Discount Auctioned weekly Benchmark bills by regular auction. Tax-exempt states. bond anticipation notes (BANs). revenue anticipation notes (RANs)." Freddie Overnight to 360 discount notes Mac. Inc." etc. Long-term bonds with put options to demand repayment Municipalities.

difference securities by dealer with quoted as repo simultaneous agreement interest rate to repurchase. McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies.usually less than 10 years Dealers or issuer will repurchase paper Dealers will repurchase notes Fair secondary market Unsecured promissory note. Inc. All rights reserved . also industrial (MTNs) firms Bankers' acceptances (Bas) Major commercial banks Usually discount Interest-bearing. usually less than 10 years Minimum 270 days. finance companies. also open repos (continuing contracts) Discount Repurchase agreements (repos) Dealers in U.30 Money Market Investments Investment Non-negotiable time deposits and negotiable certificates of deposit (CDs) Borrower MATURITIES When Issued Marketability Basis for Calculating Interest Comments Usually 1 to 3 months. may be placed through dealer or directly with investor Unsecured promissory note placed through dealer Demand to pay that has been accepted by a bank Commercial banks.S. also Fair secondary longer-maturity market for Interest-bearing with variable-rate CDs negotiable CDs interest at maturity Receipt for time deposit Maximum 270 days. government securities No secondary market Repurchase price set higher than selling Sales of government price. savings and loans Industrial firms. also (CP) municipalities Largely finance companies and Medium-term notes banks. usually fixed rate 1-6 months Overnight to about 3 months. and bank holding Commercial paper companies.30.

30. All rights reserved .31 Short Term Assets Short term assets held by US non-financial corporations (2nd quarter 2006) 600 500 $ billion 400 300 200 100 Money-market funds Cd s and time deposits Commercial paper Tax-exempt Treasury securities Agency securities Repos 0 McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc.

org www. All rights reserved .toolkit.int McGraw Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies. Inc.decisioneering.federalreserve.32 Web Resources Click to access web sites Internet connection required www.30.cch.com www.com www.jaxworks.com www.bis.ecb.gov www.

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->