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TABLE OF CONTENTS
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TABLE OF CONTENTS........................................................................................................................... 1 KEY TERMS ............................................................................................................................................ 3 AUTHOR’S PROFILE .............................................................................................................................. 8 IMPORTANT! .......................................................................................................................................... 9 DISCOUNT & ANNUITY FACTOR TABLES ......................................................................................... 11 Chapter 1: FINANCIAL MANAGEMENT FUNCTION ............................................................................ 13 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT .................................................................... 19 Chapter 3: THE NATURE, ELEMENTS & IMPORTANCE OF WORKING CAPITAL ............................ 29 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS ....................................................... 32 Chapter 5: DETERMINING WORKING CAPITAL NEEDS & FUNDING STRATEGIES ........................ 64 Chapter 6: THE NATURE OF INVESTMENT DECISIONS & THE APPRAISAL PROCESS ................. 67 Chapter 7: NON DISCOUNTED CASH FLOW TECHNIQUES .............................................................. 68 Chapter 8: DISCOUNTED CASH FLOW (DCF) TECHNIQUES ............................................................ 69 Chapter 9: ALLOWING FOR INFLATION & TAXATION IN DCF ........................................................... 72 Chapter 10: ADJUSTING FOR RISK & UNCERTAINTY IN INVESTMENT APPRAISAL ...................... 74 Chapter 11: SPECIFIC INVESTMENT DECISIONS .............................................................................. 75 Chapter 12: SHORT & LONG TERM FINANCE .................................................................................... 79 Chapters13: INTERNAL SOURCES OF FINANCE & DIVIDEND POLICY ............................................ 83 Chapter 14: GEARING & CAPITAL STRUCTURE CONSIDERATIONS ............................................... 85 Chapter 15: FINANCE FOR SMALL & MEDIUM SIZED ENTITIES (SMEs) .......................................... 87 Chapter 16: ESTIMATING COST OF CAPITAL .................................................................................... 89 Chapter 17: RELATIONSHIP B/W COST OF CAPITAL, CAPITAL STRUCTURE & INVESTMENTS ... 92 Chapter 18: BUSINESS VALUATION TECHNIQUES ........................................................................... 95 Chapter 19: EFFICIENT MARKET HYPOTHESIS................................................................................. 98 Chapter 20: BASICS OF FINANCIAL RISK MANAGEMENT ................................................................ 99 Chapter 21: HEDGING TECHNIQUES FOR FOREIGN CURRENCY RISK........................................ 101 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK ................................................. 104 RELATED eBOOKS ............................................................................................................................ 107 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting, Performance Management, Business Analysis, Ebusiness / Ecommerce Guide Free Download

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KEY TERMS
A Agency · 14 Aggregate demand · 22 Aggregate Supply · 22 Agreement Date · 100, 102 Annuity · 70 Average Growth Rate · 90 B Bad Debt Risk · 42 Balance Of Payments · 106 Barter Trade · 52 Basis Risk · 102, 105 Baumol Model · 65 Benefits · 16 Bill Of Exchange · 51 Boom · 28 Brand, Copyright & Patents · 96 Business Angels · 88 Business Cycle · 27 Business Risk · 93 Buying & Selling Rate · 100 C Cap · 105 Capital Asset Pricing Model (CAPM) · 90 Capital Cash Flows · 73 Clientele Effect · 84 Collar · 105 Combine Probability · 74 Confidence · 22 Contingent Assets · 96 Contingent Liabilities · 96 Contract Price · 102 Contract Size · 102 Conversion Premium · 97 Convertible Loan Notes · 81 Cost of Equity · 90 Credit Control · 40 Credit Insurance · 52 Credit Or Customer Analysis · 39 Credit Policy · 39 Currency Option · 103 Currency Swap · 103 Current Asset Ratio · 38 D Debt Finance · 81 Deep Discount Bonds · 81 Deflation · 70 Deflationary Gap · 27 Depression · 27 Derivative · 103 Development Expenditure · 96 Direct Quote · 100 Discount Rate · 70 Discounted Payback Period · 71 Discounting · 70 Dividend Growth Model (DGM) · 90 Dividend Valuation Model (DVM) · 96

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Financial Management | Page 4 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.· 90 Equivalent Annual Cost (EAC) · 77 Exchange Rate · 23 Expectation Theory · 106 Expected Values · 74 Export Factoring · 51 F Factoring · 44 Finance Lease · 76 Financial Cash Flows · 73 Financial Risk · 93 Fiscal Policy · 21 Fixed Interest Rate Risk · 105 Floatation · 80 Floor · 105 Floor Value · 97 Fluctuating Assets · 65 Foreign Exchange Risk · 100 Forward Contract Hedge · 102 Forward Rate · 102 Forward Rate Agreements (FRAs) · 105 Franchise · 78 Free Cash Flows · 71 Future Contract Hedge · 102 Future Market · 102 G Goal congruence · 14 Goodwill · 96 Gordon’s Growth Rate · 90 Government Grants · 78 Government Policy · 22 H Hard Capital Rationing · 77 Hedging · 100 I Indirect Quote · 100 Inflation · 24.COM Divisible Projects · 77 E Earnings Per Share · 94 Earnings Yield · 94 Economic Risk · 100 Efficient Market Hypothesis · 98 Equity Beta · 91 Equity Finance · 80 Equity Risk Premium . Business Analysis. 70 Inflation Rate · 70 Inflation Rate Parity Theory · 102 Inflationary Gap · 27 Initial Investment · 73 Initial Public Offer (IPO) · 80 Interest Rate · 70 Interest Rate Option · 105 Interest Rate Parity Theory · 102 Interest Rate Risk · 105 Interest Rate Swap · 105 Invoice Discounting · 49 Invoicing In Home Currency · 100 Irredeemable Loan Notes · 81 J Joint Venture · 78 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.COM Just in Time (JIT) · 62 L Lapse · 86 Lead & Lag Payment · 100 Lease · 76 Lesser & Lessee · 76 Letter Of Credit · 51 Liquidity · 30 Liquidity Preference Theory · 106 Liquidity Ratios · 38 Loan Notes (Bonds or Debenture) · 81 M Macro Economics · 20 Macroeconomic Policy · 20 Market Imperfection Theory · 93 Market Rate Of Return · 90 Market Segmentation Theory · 106 Matching · 100 Matching Policy · 65 Micro Economics · 20 Miller & Modigliani (M&M) Theory · 93 Miller & Modigliani Theory · 84 Miller-Orr Model · 65 Monetary Policy · 20.Financial Management | Page 5 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT. 106 Money Market Hedge · 103 Mutually Exclusive Projects · 78 N Negative Gap · 105 Net Assets Valuation Model · 96 Netting · 100 Non Systematic Risk · 90 Non-Recourse Factoring · 45 O Operating Lease · 76. 80 Optimal or Economic Order Quantity (EOQ) · 57 Outsourcing · 78 Overdraft · 38 Overdrafts · 80 Overtrading & Undertrading · 65 P Par Value · 81 Pecking Order Theory · 93 Pension · 16 Permanent Assets · 65 Perpetuity · 70 Placing · 80 Positive Gap · 105 Pre-Emption Right · 80 Preference Share Capital · 80 Present Value (PV) · 70 Price Earnings Ratio · 94 Probability Analysis · 74 Profit Related Pay · 15 Project Specific Fixed Cost · 73 Q Quick Asset Or Acid Test Ratio · 39 Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 . Business Analysis.

Financial Management | Page 6 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. 103 Settlement On Net Basis · 100 Share Based Payment · 15 Share Options · 15 Short Term Loan · 80 Signalling Effect · 84 Single Period Capital Rationing · 77 Smoothing · 105 Soft Capital Rationing · 77 Spot Rate · 102 Stagnation · 26 Strong Form Efficient · 98 Subscribe · 86 Systematic Risk · 90 T Tangible Assets · 96 Tax Savings On Capital Allowance · 73 Theoretical Ex-Right Share Price · 86 Tick · 102 Time Value of Money · 70 Traditional View · 84. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 . Performance Management. 93 Transaction Risk · 100 Translation Risk · 100 U Uncertainty · 74 Unemployment · 25 V Variable Interest Rate Risk · 105 Venture Capitalist · 88 W Weak Form Efficient · 98 Weighted Average Cost of Capital (WACC) · 90 Weighted Average Cost Of Capital (WACC) · 70 Working Capital Cycle · 33 Working Capital Investment · 73 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM R Real Return · 106 Recession · 27 Recourse Factoring · 45 Recovery · 28 Redeemable Loan Notes · 81 Redemption Value · 96 Redemption Yield · 97 Renounce · 86 Residual Value · 73 Retained Earnings · 80 Return Of Equity (ROE) · 94 Return Of Investment (ROI) · 93 Revenue Cash Flows · 73 Risk · 74 Risk Free Rate Of Return · 90 S Sale & Lease Back · 81 Script Dividend · 84 Semi Strong Form Efficient · 98 Sensitivity Analysis · 74 Settlement Date · 100.

COM Y Yield Curve · 106 Z Zero Coupon Bond · 81 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.Financial Management | Page 7 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 .

com E-mail: kabuli_52@hotmail.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.COM AUTHOR’S PROFILE Name: Murtaza Lanewala Career Status: Freelance writer & tutor for professional accountancy qualifications. Business Analysis.Financial Management | Page 8 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT. Performance Management. Author & CEO of accasupport. Professional bodies include ACCA.com or murtaza@accasupport. CIMA and ICAEW.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .

please take care. Demo version of this material is available free of cost. Business Analysis. Author & accasupport. 2 Copyright Notice This material is subject to copyright protection law. All rights reserved.COM IMPORTANT! 1 Disclaimer This material is sold only through accasupport. it is unethical from social viewpoint and sinful act from religious viewpoint as well. Recommendations made of any kind are intelligent guesses to the best of author’s knowledge. countries. not to pay for demo version of this e-book to unauthorized sellers. Clickbank. religions etc are used for educational purpose only. In addition.Financial Management | Page 9 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT.1 Do You can make a backup copy of this material. schools etc. organizations. 2. Printed books etc. therefore. Performance Management.com website. However. It is not intended to abuse. Names of individuals. discriminate and hurt anyone's feelings and dignity.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. CDs. Readers of this material will be solely responsible for the consequences of any decisions made in real life. Copyright ©2012 Murtaza Lanewala. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. you will not be able to receive free updates given to the buyers of original material.com are not responsible to the readers of this material under any circumstances. Copyright infringement is effectively theft of intellectual property.com is the credit card processing organization for collecting payments for this material. This material is not available offline (shops. You can use parts of this material provided you quote the appropriate reference to the author and material. Ebusiness / Ecommerce Guide Free Download in f t +1 . Infringement of copyright law results in criminal liability (fine or imprisonment or both).) in any form such as DVDs. Materials purchased from unauthorized source can be out of date and incomplete.

2 Do Not You cannot publicly share this material in the form of hard copy or soft copy (physically and over the internet) for cash or for free. You cannot resell this material unless you are selling the original copy purchased.COM 2. Unless needed for accessibility purpose or personal use. Business Analysis. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. You cannot change the file format of this material or make it editable. You cannot use any part of this material in or with contents associated with violence. politics. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. audio etc. video. religious and pornographic contents in any way.Financial Management | Page 10 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT. You cannot transform this material into other means of communication such as photocopy. Ebusiness / Ecommerce Guide Free Download in f t +1 .

Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 11 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT.COM DISCOUNT & ANNUITY FACTOR TABLES Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.

COM Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis.Financial Management | Page 12 of 108 THIS MATERIAL IS NOT AVAILABLE OFFLINE & ONLINE IN ANY FORM EXCEPT ACCASUPPORT. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Ebusiness / Ecommerce Guide Free Download in f t +1 .

no Headings (click the cross-ref below for easy navigation) 1 Agency 2 Financial Objectives in Profit Vs Not-for-Profit Pg. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 13 of 108 Chapter 1: FINANCIAL MANAGEMENT FUNCTION Chapter 1: FINANCIAL MANAGEMENT FUNCTION Sub Headings S.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 14 16 Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Performance Management. Business Analysis.

Financial Management | Page 14 of 108 Chapter 1: FINANCIAL MANAGEMENT FUNCTION 1 Agency 1.com 1. Directors have their own needs and desires.5 Reward Schemes 1. Ebusiness / Ecommerce Guide Free Download in f t +1 .1 Salary Salary is the most basic form of financial record given to directors and employees. they have to rely on directors to look after their interest.1 Definition of Agency Relationship Agency is a relationship between principal and agent.2 Agency Problem In the context of company. Goal congruence can be achieved by aligning the goals of directors in line with the goals of shareholders.3 Goal Congruence Goal congruence means making directors act in the interest of shareholders. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. 1.4 Ways to Reduce Agency Problem 1. Shareholders being too many in numbers and may not have technical knowledge of the company’s operations would not be able to protect their interest themselves. Principal delegates some responsibility to be performed on behalf of principal. Danger is that directors do not act in the best interest of shareholders. Agent can be responsible to more than one principal. Directors’ acting other than in the interest of shareholders is an agency problem. Performance Management. Business Analysis. accasupport. 1. directors are required to protect the interest of shareholders. Directors are granted necessary authority through articles of association and employment contract. Principal also gives agent necessary decision-making authority.com Unfortunately. Agency problem creates the need for building mechanism. Example: Shareholders delegate responsibility to board of directors to management day-to-day operations of organization. It does not affect performance and risk attitudes of managers. which may be different from shareholders needs and desires. accasupport.5.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. which promotes goal congruence or Alignment of interest.

accasupport.5. Performance Management.3 Profit Related Pay Directors’ remuneration based on profit encourages directors to focus their attention towards generating profit for the shareholders.2 Bonus Bonus is financial reward given to motivate directors and employees in expectation that motivation will lead to improved performance. Share based payment also encourages directors to take controlled risk in line with shareholders expectation. 1.e.5. Increase in share price leads to increase in shareholders wealth. Share based payment encourages directors to focus their attention on increasing share price. Profit related pay could lead to directors undertaking excessive risky investment projects. 1.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. It is consistent with the primary objective of financial management i. accasupport. maximization of shareholders wealth. Ebusiness / Ecommerce Guide Free Download in f t +1 .5 Share Options Share options are incentive given to directors to buy shares in the company at specified future exercise date and at pre-defined exercise price.com Profit related pay focuses directors’ attention on short-term performance rather than long-term performance. It does not ensure that directors focus on shareholders wealth maximization. Business Analysis. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. which may be over and above the wish of shareholders. It encourages directors to increase share price of the company above the exercise price in order to realize gain through buying shares at lower share price than market price at exercise date. 1. Financial management primary objective is to focus on long-term shareholder wealth maximization.com It does not affect performance and risk attitudes of managers.4 Share Based Payment Share based payment is the reward given to directors in the form of shares with a condition to hold those shares for certain period.5.Financial Management | Page 15 of 108 Chapter 1: FINANCIAL MANAGEMENT FUNCTION 1.5.

not for profit organizations do not have profitability as its primary objective. Pension may not be realized if organization gets bankrupt. Profit motive organizations have profitability as its primary objective. Performance Management. It is given to motivate directors so that work can be performed efficiently. 1. Share option also encourages directors to take controlled risk in line with shareholder expectations.com It does not encourage directors to maximize shareholders wealth. Ebusiness / Ecommerce Guide Free Download in f t +1 . However. Business Analysis.7 Pension Pension is the financial reward as a percentage of basic salary given to directors and employees when they retire.Financial Management | Page 16 of 108 Chapter 1: FINANCIAL MANAGEMENT FUNCTION Share options direct management attention on primary objective of financial management i. Profit motive organization is legally accountable to shareholders/owners (primary stakeholder). accasupport. accasupport. attend meeting with bankers etc in time. 1.e. Example: A car given to director so he/she can travel to workplace. it has no contribution towards motivating directors to maximize shareholders wealth beyond existing level. not for profit organizations also need to focus on profitability for meeting day-to-day expenses.com Security of pension funds depends on stability of the organization.6 Benefits Benefits are non-financial reward given to directors and employees.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. 2 Financial Objectives in Profit Vs Not-for-Profit Financial objectives in not for profit and public organizations are different from financial objective in profit motive organizations. It encourages directors to take long-term view organizational performance. However.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. maximization of shareholders wealth.5.5. accasupport. On the other hand.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. efficient use of funds provided by donors etc.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. accasupport. Society involves more than one legitimate stakeholder such as donors. profit motive organization may also have objectives other than profit making. It becomes difficult to decide which is the primary objective and deciding priority for rest of the secondary objectives. Not for profit organization may have more than one objective such as providing quality service. These objectives are necessary for achievement of primary financial objective. Profit motive organizations must provide value for money to its customers if it has to achieve its financial objectives in short term (such as profitability. Stakeholders are interest holders. efficiency. government. public at large etc. This will give cross selling (selling more than one product to same customer) benefits to organization. effectiveness) to the users of services. performance of profit motive organization can also be assessed in terms of value for money.Financial Management | Page 17 of 108 Chapter 1: FINANCIAL MANAGEMENT FUNCTION Example: Rent of the premises used as office of the organization. liquidity) as well as long term (such as growth). This objective supports the primary objective of profit making.com Not for profit organization usually exists to provide services to the society. However. Payment of stipends (remuneration) to volunteers. which can affect (claim) or be affected by organizational activities. Existing customers may also prefer to buy related goods from the same organization. Ebusiness / Ecommerce Guide Free Download in f t +1 .com Performance of not for profit organization is usually measured against its ability to provide Value for money (economy. accasupport. accasupport. Performance Management. Business Analysis. Example: Increase in number of products offered by organization by 30% in next 2 years. However. users of services. providing services to greater number of people.

Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management. Business Analysis.Financial Management | Page 18 of 108 Chapter 1: FINANCIAL MANAGEMENT FUNCTION Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 19 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT Sub S. Performance Management. Business Analysis.no 1 2 3 Headings Headings (click the cross-ref below for easy navigation) Macro Vs Micro Economics Macro-economic Policy Macro-Economic Factors Affecting Business Activity Pg.no 20 20 22 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

Government has following two main policies to achieve its objectives.1 Monetary Policy Monetary policy deals with the interest and exchange rates. Macroeconomic policy has following objectives.com accasupport.1 Macro-Economics Macro-economics is study of effects of total activities of households. Government can encourage the use of imported goods by increasing Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Government can encourage investment by reducing interest rates and conversely reduce investments by increasing interest rates. Example: Reduction in interest rates leads to increased activity in stock market and bullion market.2 Micro-Economics Micro-economics is study of effects of separate activities of individuals. Government may decide to operate market without any regulation as free market in the hope that free movement of capital will result in best economic growth. government generally intervenes through making regulations to promote economic growth. Ebusiness / Ecommerce Guide Free Download accasupport.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Reduction in interest rate changes public preference from savings to investment. Business Analysis.com in f t +1 . firms & government on the national & international economy. Exchange rate influences imports and export from/to the country. Performance Management. Interest rate influences individual investment decisions. 2 Macro-economic Policy Macro-economic policy is the government decisions on the operation of markets.com accasupport. Micro-economics refers to study of one economics entity at a time. individual households and firms. Macro-economics include all the economic activities of private as well as public sector. 2.Financial Management | Page 20 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT 1 Macro Vs Micro Economics 1. 1. In practice.

Conversely. 2. Government spending can be used to reduce the economic imbalance between rich and poor by providing basic goods or services to society at subsidised or free of charge. Similarly.com accasupport.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Increase in exchange rate will make goods more expensive to foreign countries. Taxation is the source of revenue for government.com accasupport. Government spending also influences the demand for goods or services and prices of goods or services. decrease in taxation results in increased disposable income for spending. government can reduce exports from the country by increasing exchange rate of its home currency. Performance Management. If demand exceeds in relation to supply then prices of goods or services arises (inflation). Reduction in exchange rate will make goods produced by the country cheaper to foreign countries.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 . if demand lacks in relation to supply then prices of goods or services reduces (deflation). It influences public spending on consumer and capital goods by increasing or decreasing the level of disposable income for private sector. Increase in taxation results in decreased disposable income for spending on satisfaction of needs and capital investments.2 Fiscal Policy Fiscal policy deals with taxation and government spending. Conversely.Financial Management | Page 21 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT exchange rate of home currency and conversely reduce the use of imported goods by decreasing exchange rate of home currency. Business Analysis. Level of spending influences demand for goods or services and prices of goods or services. Disposable income is the earnings remaining after meeting all liabilities. accasupport. Conversely. government can encourage exports from the country by reducing exchange rate of its home currency. Government can spend its income (taxation) on industries/sectors in which government wishes to raise supply of goods or services to provide goods or services to private sector and to control price inflation.

com in f t +1 .3 Confidence accasupport.com Confidence among consumers makes them to spend higher percentage of income on goods or services. inflation.com 3.2 Aggregate Supply Aggregate supply is the sum of supplies for different goods or services produced in country. 3. Performance Management. roads.Financial Management | Page 22 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT 3 Macro-Economic Factors Affecting Business Activity 3.1 Aggregate Demand Aggregate demand is the sum of demands for different goods or services produced in country. sewage. communication media etc) to boost economic activities. interest rates and money supply). expected future conditions etc. Formula: Government aim is to equal aggregate demand and aggregate supply at a level where workforce is fully employed. Ebusiness / Ecommerce Guide Free Download accasupport. environmental. Government can provide infrastructure (transportation. accasupport.com Confidence is psychological factor influencing economic activities. Confidence depends on expectation of political. 3.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Formula: accasupport. Government can increase demands for goods or services through fiscal policy (taxation and government spending) and monetary policy (exchange rates. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. employment level.4 Government Policy Government can encourage economic activities in following ways. power. Business Analysis. Confidence among firms makes them invest more money in the business. Full employment is one of the objectives of the macroeconomic policy of government. demand. Confidence is the expectation of future stability and growth of economic activities.

Adverse balance of payments makes government to borrow foreign exchange for repayment.7 Exchange Rate Exchange rate is the rate at which home currency can be traded in return for other currency. accasupport.Financial Management | Page 23 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT Government can boost confidence by providing security to the assets of individuals. To promote maximum economic growth all the resources (labour. 3. 3. Financing decisions depend on the cost of using finance such as interest rate. money and machine) in an economy should be fully employed. accasupport.com If interest rate will fall individuals and firms will increase their borrowings and individual will consume more and firms will undertake investment project. material and workers.5 Use of Resources Resources are factors of production. Business Analysis. If interest rate will rise individual and firms will reduce their borrowings and individual will consume less and firms will abandon their investment projects.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. materials. 3. Performance Management. which were previously unattractive. which lead to increase in aggregate demand.6 Finance Finance enables us to employ other resources such as labour. Exchange rates can impact balance of payment (import versus export). which enables production of goods or services.com in f t +1 . It affects credit rating of a country in the long Buy Full Financial Management Book (380 ±) at ACCASUPPORT. household and firms. As investment projects will be undertaken.com Economic growth depends on using resources to its maxim capacity and using it more efficiently. Resources can be used more efficiently by provision of training and use of advanced technology. As investment projects will reduce. This can be done by making legislations and providing policing services. demand for goods or services of suppliers to the firm will increase. demand for goods or services of suppliers to the firm will reduce. Ebusiness / Ecommerce Guide Free Download accasupport. which lead to decrease in aggregate demand. which were previously attractive.

inflation results in reduced standard of living. It increases the risk of foreign exchange gain or losses in assets of the firms when assets are translated in their home currency. Government aim is to control inflation to reduce the uneven distribution of wealth. Prices are increased to take the advantage of excess demand by providing goods or services to people that are able to pay more for limited goods or services. Households with limited income (pension. As the money borrowed will have lesser value (purchasing power) when making repayment. government relief etc) have to limit their consumption. It is possible to achieve economic growth in times of high Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download accasupport. Business Analysis. Inflation increases the economic imbalance between rich and poor by redistributing wealth in a society.com in f t +1 .com accasupport. Thus. accasupport. Performance Management. Inflation results in reduced purchasing power of money. businesses having greater liabilities with enjoy economic profits on repayment.com Certain percentage of inflation is considered as indication of economic growth. Increase in prices (inflation) is considered as an indication of full employment of resources. Volatility in exchange rate increases risk of foreign exchange gains or losses and leads to increase in cost of Hedging100. natural resources and machinery) to its full capacity.Financial Management | Page 24 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT term. 3. Businesses having sound assets may enjoy capital gains on its asset. as beyond certain level it can be difficult to borrow foreign exchange. Exchange rate need to be stable.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Rich get richer as assets increase in market value and poor get poorer if he/she is not able to increase his/her service charges in proportion to inflation. It is because demand is allowing the use of economic resources (labour. Similarly. Households require more money to continue consuming same quantity and quality of goods or services.8 Inflation Inflation is the increase in prices of goods or services for consumption and capital investment. Wide fluctuation in exchange rate also discourages investment by foreign firms in a country. capital.

Exchange rate depreciation will make imports expensive for a home country and exports cheaper for foreign countries. Customers have to face frequently new prices. Rate of unemployment is determined by dividing unemployed labours with total labours. Ebusiness / Ecommerce Guide Free Download accasupport. 3.9 Unemployment Unemployment is the unavailability of opportunities for individual to contribute their services to the economy. Inflation has some additional drawbacks as well. All these events will be beneficial for economic growth but benefits may not be evenly distributed among the members of society. people tend to invest their earnings as earlier as possible. Expensive imports will result in less demand for imported goods and cheaper exports will result in more demand for goods to export. More time have to spend on revising budgets and selling prices for goods or services. which makes financial and resource allocating decisions difficult and less meaningful.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. This will put additional cost burden on firms.com in f t +1 . Inflation has impact on other objectives of economic policy also.Financial Management | Page 25 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT inflation but this growth will not benefit all the members of the society in equal. In times of high inflation. Inflation will lead to depreciation of exchange rates. Performance Management. Business Analysis. Individual tends consume less to save money for the future. High inflation leads to uncertainty about future economic wellbeing for individuals and firms.com accasupport. In times of high inflation. financial figures have little meaning in evaluating performance of managers and entire organization. Inflation makes planning and budgeting difficult for individuals and firms. This will make balance of payment favourable. which forces them comparing price again and again. Because keeping money in form of cash will erode the purchasing power of their earnings. Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

1 Side Effects of Unemployment Unemployment will lead to reduced standard of living in the economy as whole.com Unemployment will also leads to reduction in wage rates. Crime rates and illiteracy increases with the increase in unemployment rate.9. Ebusiness / Ecommerce Guide Free Download in f t +1 .2 Stagnation Stagnation is the period of significant slow economic growth of long period. Loss of skilled workforce is the loss of human capital to the country. bargaining power of employer also increase in comparison with employees.3 International Payments Disequilibrium International payments disequilibrium is the surplus or deficit in the balance of payments.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Quality may deteriorate to produce goods or services at reduced prices to attract price sensitive consumers. employment legislation has given some protection to labours by implementing minimum wage rate requirement. 3.com Unemployment may result in reduced demand for goods or services. accasupport. As the level of unemployment increases. However. accasupport.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis. This is put strain on business profitability and increase competition on the grounds of prices rather than quality among businesses. Unemployment for long period will result in loss of skill due to lack of work available to retain level of skill.Financial Management | Page 26 of 108 Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT Unemployment means certain portion of country’s workforce (labour resource) is not utilized to promote economic growth. Deficit results where total imports exceeds total exports. Surplus results where total exports exceeds total imports. accasupport. Unemployment increases the government expenditure for providing benefits (support) to unemployed people. 3.9. Performance Management. 3.9.

Financial Management | Page 27 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT

3.10 Inflationary Gap Inflationary gap is the excess of demand over supply when workforce is fully employed. It results in increased price. Supply cannot be increased using domestic factors of production (men, machine, material, money). Inflationary gap can be reduced by either reducing demand or by importing goods to satisfy demand. 3.11 Deflationary Gap Deflationary gap is lack of actual supply than fully employed workforce can supply, as aggregate demand is below the level required for the full employment of the workforce. Prices tend to remain constant or fall. 3.12 Business Cycle Business cycle has following four phases. Diagram: Boom
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Recession

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Recovery

Depression 3.12.1 Depression Depression is the extremely adverse economic condition. Demand, prices and employment level falls and at their bottom. Businesses tend to shut down and investors lose their confidence in the market. 3.12.2 Recession Recession is the less serious economic condition than depression. If recession continues for long period time, it may turn in depression. However, government intervention and technological changes can rescue in situation.
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Financial Management | Page 28 of 108
Chapter 2: FINANCIAL MANAGEMENT ENVIRONMENT

3.12.3 Boom Boom is the extremely favourable economic condition. Demand, prices, employment level all increases and reaches at peak. Businesses launches new products and investors have optimistic view of the future economic growth. 3.12.4 Recovery Recovery is the period of medium growth and is a way to boom. Recovery is generally considered a slower process than recession.
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Chapter 3: THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL

Chapter 3:

THE NATURE, ELEMENTS & IMPORTANCE OF WORKING CAPITAL
Sub Headings S.no Headings (click the cross-ref below for easy navigation) 1 Objectives of Working Capital Management Pg.no 30

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Working capital is the blood of any organization without it cannot continue its operations regardless of how much fixed assets are owned by the organization. 1. Hence.2 Liquidity Liquidity is the ability to meet cash requirements for settling day-to-day expenses such as payment of wages and salaries. maximization of shareholders wealth. Business must be profitable in the short term to add shareholder value in the long term.com accasupport.com finished goods.1 Profitability Profitability is related to the primary objective of financial management i. It is due to cash is not used for producing or purchasing accasupport. Failure to meet day-to-day expenses can force organization into dissolution or liquidation by the creditors. Profitability and liquidity are two conflicting objectives. Example: Maintaining higher cash balance will result in loss of sales to customers. Effective working capital management depends on achieving a balance between these two objectives. It is due to the application of accrual accounting concept to arrive at profit for the year for financial reporting purpose.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. accasupport. Liquidity is essential for survival and long-term profitability of the organization.Financial Management | Page 30 of 108 Chapter 3: THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL 1 Objectives of Working Capital Management Working capital is material item in balance sheet of most organizations. Performance Management. Favourable performance at one objective inevitably leads to adverse performance at other objective. office rent etc. Working capital management has two main objectives. 1. electricity bills. Business Analysis. without survival there will be no wealth maximizing opportunities available.e. Ebusiness / Ecommerce Guide Free Download in f t +1 . Profitable organization may not have enough cash to day-to-day liabilities.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 31 of 108 Chapter 3: THE NATURE ELEMENTS & IMPORTANCE OF WORKING CAPITAL Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis. Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 .

Financial Management | Page 32 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Sub S.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 33 34 38 39 40 40 44 45 49 50 52 55 57 57 60 62 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Headings Headings (click the cross-ref below for easy navigation) Working Capital Cycle Working Capital Ratios Liquidity Ratios Account Receivable Management Factors Affecting Trade Receivables Policy Credit Policy Evaluation Factoring Evaluating Proposal for Factoring Invoice Discounting Foreign Trade Receivables Calculating & Commenting Early Settlement Discounts Discounts from Suppliers Economic Order Quantity (EOQ) Model Optimal or Economic Order Quantity (EOQ) Optimal Reorder Quantity with Bulk Purchase Discount Just in Time (JIT) Pg. Ebusiness / Ecommerce Guide Free Download in f t +1 . Business Analysis. Performance Management.

Working capital is excess of current assets over current liabilities. Trading activities can be payment of wages to workers.Financial Management | Page 33 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 1 Working Capital Cycle Working capital cycle is also called cash management cycle. Business Analysis. Performance Management. Formula: Or accasupport.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 . Working capital is as important for organizations as blood for human body. Efficiency of working capital depends on efficient control over elements of working capital as above. purchasing goods and selling for profit etc.com Working capital is also called net current assets if current assets are greater than current liabilities or net current liabilities if current assets are less than current liabilities. accasupport.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Working capital requirement depends on time taken to pay suppliers and time taken to receive payment from customers.com Not for profit organization needs working capital in the same way as profit making organization. Working capital is fund required to finance trading activities organization. accasupport.

but we receive payment from customers in 40 days. Trade receivable balance given in the balance sheet is taken as accasupport.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. accasupport.com representative of balance owed from customers at any point in time during the accounting period.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Therefore. Even.com Credit sales or Trade receivables Cash paid to suppliers Working capital or cash requirement Cash received from customers 2 Working Capital Ratios Working capital cycle depends on the following: 2.com accasupport. Business Analysis. if personal savings are used to finance working capital it involves opportunity cost because of not being able to earn interest by investing it elsewhere. Performance Management.1 Trade Receivables Revision Trade receivable turnover is the average number of days customers take to repay their debts. We will need working capital (cash) for ten days to meet day to day trading expenses between 10 (40-30) days. If we pay suppliers in 25 days but we receive payment from customers in 20 days. Diagram: Credit purchase or Trade payables accasupport. Surplus cash can be invested elsewhere to earn interest income.Financial Management | Page 34 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Example: Suppose. We will have surplus cash for 5 (20-25) days after settling all liabilities. Ebusiness / Ecommerce Guide Free Download in f t +1 . longer working capital cycle requires more cash and cost of raising cash to finance working capital will erode profitability. we pay supplier in 30 days. This need can be fulfilled through personal savings or raising finance.

Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Trade receivable turnover in days is 40 days. It is because of increase in trade receivable turnover from 40 to 45 days. Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 .740 ($21. Similarly. we can manipulate the equation as follows: accasupport. decrease in trade receivable level decrease working capital.com Trade receivable level or amount is increased to $2.918$24.000 is increased by the same amount. To find trade receivables level or amount. decrease in trade receivable turnover in days decreases trade receivables level and working capital requirement. Business Analysis. Similarly.658) and working capital requirement to finance credit sales of $200. Trade receivable turnover depends on credit term offered by organization and effectiveness of credit control system. then increase in trade receivable turnover in days increases trade receivables level and working capital requirement.Financial Management | Page 35 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Increase in trade receivables level increases working capital. Credit sales for the year are $200. If we assume credit sales are made as constant rate. Required: Calculate the change in trade receivable level if customers would have taken 45 days on average to pay their debts.000.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Similarly. Performance Management. To find inventory level or amount. Credit purchases for the year are $150. Business Analysis. Required: Calculate the change in inventory level if inventory is sold to customer after 25 days from the date of purchase.2 Inventory Revision Inventory turnover is the average number of days inventory is held before it is sold to customers.000. we can manipulate the equation as follows accasupport. Increase in inventory levels increases working capital. Inventory turnover in days is 30 days. If we assume inventory is purchased at constant rate. decease in inventory level decreases working capital. then increase in inventory turnover in days will lead to increase in inventory levels and working capital requirement. Inventory balance given in the balance sheet is taken as representative of balance of inventory held at any point in time during the accounting period. decrease in inventory turnover in days will lead to decrease in inventory levels and working capital requirement.Financial Management | Page 36 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 2. Ebusiness / Ecommerce Guide Free Download in f t +1 .com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Similarly.

055 ($12. Ebusiness / Ecommerce Guide Free Download in f t +1 . If we assume credit purchases are made at constant rate. then increase in trade payable turnover in day increase trade payable level and decrease working capital requirement.000.329-$10. Similarly. we can manipulate the equation as follows Buy Full Financial Management Book (380 ±) at ACCASUPPORT. To find trade payable level or amount. Account trade payables turnover in days is 50 days. Inventory is converted to trade receivables 5 days earlier.3 Trade Payables Revision Trade payable turnover is average number of days taken by organization to pay its suppliers. 2. increase in trade payable level decreases working capital.274) and working capital requirement decreased by the same amount. decrease in trade payable turnover in days decrease trade payable level and working capital requirement. Credit purchases for the year are $150. It is because of decrease in inventory turnover from 30 to 25 days. Required: Calculate the change in trade payable level if trade payable is sold to customer after 60 days from the date of purchase. Performance Management. Business Analysis. Trade payable balance given in the balance sheet is taken as representative of balance owed to customers at any point in time during the accounting period. Similarly. Decrease in trade payable level increases working capital.Financial Management | Page 37 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Inventory level or amount is decreased to $2.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.

3.548-$24. Formula: accasupport. Trade payable has inverse relationship with working capital. then high levels of current Buy Full Financial Management Book (380 ±) at ACCASUPPORT.com Management Accounting. Business Analysis.com Current asset ratio should not be interpreted in isolation it should be considered in combination with working capital ratio. Ebusiness / Ecommerce Guide Free Download in f t +1 . Increase in trade receivables and inventory leads to increase in working capital requirement. If suppliers demand more often.110 ($20. Performance Management.658) and working capital requirement is decreased by the same amount. 3 Liquidity Ratios Working capital should be monitored for liquidity. However. 2.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS accasupport. It is used to makeup shortfall in working capital requirement. It is because of increase in trade payable turnover from 50 to 60 days. Example: Trade payable turnover suggests how often suppliers demand their payment.Financial Management | Page 38 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Trade payable level or amount is increased to $4.4 Overdraft Overdraft is a current liability. Trade receivables and inventory has direct relationship with working capital. Using current liabilities for financing working capital needs may work well for increasing profitability and it will deteriorate liquidity of the organization. Increase in trade payable leads to decrease in working capital requirement.1 Current Asset Ratio Current asset ratio suggests the ability of organization to repay its debt when they fall due. Following ratios is calculated for determining liquidity position of the organization.

Following sources of information would be helpful in performing credit analysis. then low levels of current assets will suffice. An effective credit policy should consider following elements: In short. 4. Ebusiness / Ecommerce Guide Free Download accasupport. 4. If customers pay us more often.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Trade receivable turnover suggests how often customers pay us. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. 3. It means those customers who are reasonably likely to settle their debts within due date. We can arrange cash for payment to supplier in lesser time.1 Credit Policy Credit policy is a framework for managing accounts receivables in the business. Performance Management. Inventory is distant from cash in that it first has to be converted into receivables before it is converted into cash. credit policy provides guidance for implementing below three key areas of account receivable management.2 Credit or Customer Analysis The purpose of credit analysis is to ensure that goods or services are sold only to those customers that have goods credit rating. Quality of credit analysis depends on the source and quality of information used to assess customer creditworthiness.Financial Management | Page 39 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS assets should be available. We will have less time to arrange for payment. Formula: Inventory is excluded as it takes more time than other current assets to be converted into cash.2 Quick Asset or Acid Test Ratio Quick asset ratio suggests the ability of organization to convert its current assets into cash quickly.com accasupport. 4 Account Receivable Management There are four key areas of account receivable management. Business Analysis.com in f t +1 .

3 Credit Control Credit control involves monitoring customers to limit the risk of bad debts and cost of interest expense to the organization for financing increased requirement of working capital. However.Financial Management | Page 40 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 4. Performance Management. Terms and conditions could include mode of payment. early settlement discounts etc.com understand the text below. Ebusiness / Ecommerce Guide Free Download accasupport. 6 Credit Policy Evaluation Points to consider for evaluating credit policy are as follows.1 Incremental Cost/Savings of Financing Trade Receivables Please keep reading till the end. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Issuing of invoice and collection of funds from customers is the responsibility of sales ledger staff. You will probably do not understand the text below. Sales ledger staff should ensure that customer understands the terms and conditions at the time of issuing invoice. delivery date. They should send monthly statements to customers and ensure that any differences are reconciled in timely manner. They should also deal with any issues raised by customers in timely manner. Following are the actions that can be taken: Cost of debt collection should not exceed the amount of debt. Sales ledger staff should follow up overdue debts. Credit control involves the following tasks 4. 5 Factors Affecting Trade Receivables Policy/Credit Policy These are factors affecting the formulation of trade receivable management policy or credit policy. 6.com in f t +1 . illustration given at the end will make you accasupport.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis.4 Collection Procedures Funds collection procedures should ensure that organization receives funds from debtor within agreed terms and conditions and customers are aware and understand those terms and conditions.

Financial Management | Page 41 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Trade receivables need to be financed just like inventory and noncurrent assets. Giving extended credit terms requires more frequent monitoring of customers to reduce the increased risk of bad debts associated with longer credit terms. Incremental (additional) administration cost needs to be taken into account in the evaluation. savings in interest expense will improve profitability Incremental financing cost is additional cost of interest incurred due to extending credit term. time taken by customers to repay their debt have effect on the profitability of the organization. Maintaining sales ledger and monitoring customers result in additional cost to the organization. However. Customer may attempt to claim discounts even if they are not entitled.2 Administration Cost/Savings Receivables results in administration cost to the organization. Reduction in financing cost is savings in cost of interest incurred due to reduction in credit term. even if organization uses its own retained profits to finance trade receivables. 6. Conversely. accasupport. Business Analysis.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. In addition.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Interest expense incurred in financing trade receivables will erode profitability. Trade receivables are usually financed through shortterm source of finance such as overdraft and short-term bank loan. Ebusiness / Ecommerce Guide Free Download in f t +1 . Reduction is credit term usually leads to savings in administration cost.com accasupport. early settlement discounts give rise to more record keeping and reviewing cost. Financing trade receivables involve financing cost such as interest charge on overdraft and bank loan. Performance Management.com accasupport. In addition. then it has opportunity cost of not being used to generate interest through investment in marketable securities.

com 6.4 Contribution from Sales Extending or contracting credit period can result in increased or decreased sales revenue respectively. then bad debt expenses could be saved. Bad debt expense needs to be included in the evaluation of credit policy. If reduction in credit term is proposed. Later.com in f t +1 . Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Then these savings should be included in the evaluation of credit policy. can happen rarely. It is done to improve working capital cycle. it results in loss of revenue by the amount of discount offered. Early payment by customers results in savings in finance costs to the organization. only incremental cost of early settlement discount should be included in evaluation. Incremental contribution from additional sales needs to be taken account or loss of contribution from reduced sales should be taken into account. However.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.com ( ) 6. Only incremental contribution is relevant for the purpose of credit policy evaluation.Financial Management | Page 42 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Formula: ( ) ( ) 6. Saving in financing cost is already accounted for when calculating incremental cost of financing.5 Bad Debt Expense/Savings Risk of bad debts increases with the increase in credit term. as organization would not evaluate credit policy that will obviously result in reduced sales. Organization may have estimates available for range of credit terms. Business Analysis. Now. Reduction in early settlement discount leads to savings in finance cost. Formula: ( ) ⁄ ( ) accasupport. Ebusiness / Ecommerce Guide Free Download accasupport. Performance Management.3 Cost of Early Settlement Discount Early settlement discounts are given to encourage early payment by customer. Formula: ( ) accasupport.

accasupport. Contribution represents 60% of sales and the company currently has no bad debts. Performance Management. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ulnad Co plans to offer an early settlement discount of 1.Financial Management | Page 43 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Formula: ( ) ( accasupport.com ) Illustration: Ulnad Co has annual sales revenue of $6 million and all sales are on 30 day’s credit. Required: Evaluate whether the proposed changes in credit policy will increase the profitability of Ulnad Co. Business Analysis. while also leading to additional incremental costs equal to 0. Ebusiness / Ecommerce Guide Free Download in f t +1 . The company expects that these changes will increase annual credit sales by 5%. although customers on average take ten day more than this to pay.5% of turnover. The discount is expected to be taken by 30% of customers. Accountable receivable turnover formula is manipulated to calculate account receivable amount. with the remaining customers taking an average of 60 days to pay.5% for payment for payment within 15 days and to extend the maximum credit offered to 60 days. Accounts receivable are financed by an overdraft at an annual interest rate of 7%.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.com ( ) ( ) Weighted average is taken for 30% customers that would pay in 15 day and 70% customers that would pay in 60 days. accasupport.com 30 days are official and 10 days for delay by customers.

Factoring transfers control of receivable management from organization to factor. Factor takes over organization’s sales ledger administration.com ) ) $ Incremental in interest cost (10. New trade receivable level under new credit policy. which can upset customers. Factor can use its own policies and procedures.500) Cost of discount ($6. Ebusiness / Ecommerce Guide Free Download in f t +1 . Generally. particularly those who have to pay their debt now earlier.5%) (31.5% x 30% (28. factoring services are provided by insurance companies and banks.000 Net benefit of credit policy change 109.3m x 1. Factor performs following tasks on behalf on organization: accasupport.350) Contribution from increased sales ($6m x 5% x 60%) 180.155) Incremental administration costs ($6. Business Analysis. ( ( accasupport.995 7 Factoring Financial institution providing factoring services is known as factor. Performance Management. Rest of the 20% is paid upon receipt of payment from customer.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 44 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS To account for new credit sales those are increased by 5% from existing sales.com Usually.3m x 0. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Factor also deducts its flat fee and percentage of interest on advanced payment made by factor. factor provides advanced payment of up to 80% against sales made on credit.

Performance Management.com Net benefit/cost of factoring X/(X) $ x x x Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Factoring is suitable for small sized organizations that have not enough resources and expertise. Factoring is of two types 7. 7.Financial Management | Page 45 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Factoring service is obtained to improve the account receivable turnover.1 Recourse Factoring In with-resource factoring.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.com Factoring is particularly useful for organizations lacking expertise and experience of trade receivable management.2 Non-Recourse Factoring In non-resource factoring. Ebusiness / Ecommerce Guide Free Download in f t +1 . accasupport. 8 Evaluating Proposal for Factoring Performa for evaluating proposal for factoring: Savings in finance cost of trade receivables (see working 1) Savings in administration cost of sales ledger per year Savings in bad debt expenses (non-recourse) per year Total benefit of factoring X Factoring fee per year (see workings 2) (x) Interest cost on cash received in advanced (see workings 3) (x) Total cost of factoring (X) accasupport. factor does not bear the risk of bad debts. factor bears the risk of the bad debts. Factoring allows organization to direct their skills and resources toward core activities such as making sales to customer without having to worry for payment recovery. Business Analysis.

Financial Management | Page 46 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Formulae: Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis.

Business Analysis.000) Interest cost on cash received in advanced per year(see (49. The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will save $100.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.122.000 per year in administration costs and $350.300 Savings in finance cost of trade receivables per year (see accasupport.184) Net benefit/cost of factoring per year (644.184) working 3) Total cost of factoring per year (1.com working 1) Savings in administration cost of sales ledger per year 100. Ebusiness / Ecommerce Guide Free Download in f t +1 . A factor has offered to take over the administration of trade receivables on a non-recourse basis for an annual fee of 3% of credit sales. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. $ 76.884) Factoring is not worthwhile on financial grounds because cost of factoring exceeds benefits.000 Total benefit of factoring per year 526. A condition of the factoring agreement is that the factor would advance 80% of the face value of receivables at an annual interest rate of 7%.000 Savings in bad debt expenses per year (non-recourse) 350. non-financial aspects of factoring are also necessary to be considered such as impact on customers and reaction of shareholders.000 per year in bad debts. The 8% bonds are redeemable in ten years’ time. In addition. Required: Evaluate whether the proposal to factor trade receivables is financially acceptable. Assume an average cost of short-term finance in this part of the question only.Financial Management | Page 47 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS The average variable overdraft interest rate in each year was 5%.171. Shareholders may perceive factoring as lack of expertise of management in controlling trade receivables.000 Factoring fee per year (see working 2) (1.

Interest will be saved at 5% because organization will no longer be required to pay interest on amount saved. Therefore. Performance Management. it incurs finance cost. Therefore. Factor has demanded 3% of credit sales as factoring fee. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Factoring is always expected to decrease in trade receivables. receivable requires to be financed somehow. which is the interest payable on overdraft at 5%.Financial Management | Page 48 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Factor has claimed that they will reduce credit period to 30 days. we needed to determine new receivable balance for this new credit period. That is why. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. As discussed earlier. If factoring is expected to increase trade receivable period then factoring is obviously worthless. It is possible to come across question in the in which factor would demand flat fee. any reduction in receivable balance under this new credit period is savings to the organization. Business Analysis.

Rise in interest rate due to factoring is 2% only not 7% and this 2% is relevant for evaluating proposal for factoring. Invoices are used to raise cash at discount. then it will be equal to $3. Invoice discounter pays rest of the amount when customers settle their debts and charges a percentage of interest on cash advanced. Factor will advanced 80% of receivables on which interest is charged at 2% per year.000 will be outstanding during the year. Ebusiness / Ecommerce Guide Free Download accasupport. if we take the average of those balances. 5% of interest rate is irrelevant for decision-making purpose.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis. However.com accasupport.000. Therefore. Buy Full Financial Management Book (380 ±) at ACCASUPPORT.074.com in f t +1 .074. It is because invoices represent the security to the invoice discounter. Average receivable balance means receivables balance during the year will rise and fall such as due to seasonal demand for goods or services.Financial Management | Page 49 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 5% of interest rate already been charged by the bank. Usually. To be benefit from invoice discounting. 9 Invoice Discounting Invoice discounting is raising cash through pledging sales invoices. organization must have good quality invoice. Performance Management. In other words. up to 75% of the invoices value can be received in cash. it has to be incurred regardless of factoring proposal is accepted or not. It means cash received will be lower than the total value of invoices. invoice discounting is raising short-term loan by providing sales invoices (Receivables as an asset) as security to the invoice discounter (lender). After factoring average receivable balance of $3.

Invoice discounting is one off transaction. Invoice discounting can be used to raise short-term finance. Performance Management. Invoice discounting does not setup customers. invoice is discounted represents separate transaction.1 Problems Involved In Foreign Trade Foreign trade receivables are considered having higher risk of bad debts In foreign trade. customers have to be pursued according to their own countries legislation. 10 Foreign Trade Receivables 10. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. In the event of default. Selling organization may not be able to monitor foreign customers’ financial position as closely as domestic customers.2 Reducing Risks Involved In Foreign Trade 10. 10. If the customer defaults. Unlike factoring. Ebusiness / Ecommerce Guide Free Download in f t +1 . Each time.com Risk of bad debt rests with the organization.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. customers are given credit for longer period than in domestic trades.2. those who provide factoring services also provide invoicediscounting services. Business Analysis. In practice. accasupport. It can be used by organization having cash flow problem.com Foreign trade receivables require higher levels of investment in working capital due to cash is invested for longer period before it is received to make another sale transaction.com accasupport. organization has to repay the amount advanced by the invoice discounter. Customers only become aware of the arrangement when they default.Financial Management | Page 50 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS accasupport.1 Advance Payment It is insisting foreign customers to pay cash in advance or on delivery. invoice discounting does not takeover administration of sales ledger.

which he/she can use to receive payment and send goods to customer according to term and conditions written on letter of credit.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.2. it is safer way to carry out foreign transaction. which can be dishonoured.2. Export factoring is same as domestic factoring with the only different is that factor is situated overseas in customer’s country. letter of credit involves guarantee by the bank to pay on behalf of client (customer) even he/she get bankrupt. It is not ideal for urgent sales orders. Performance Management.4 Letter of Credit (LC) Letters of credit are used primarily in international trade transactions of significant value. Unlike bill of exchange. Bill of exchange is unconditional order by issuer to his/her bank to pay the bearer a specified sum on a specific date written at the face of document.2. Letter of credit is sent to the supplier.com Bill of exchange can be dishonoured if the issuer does not have sufficient cash balance to accept the bill of exchange. Letter of credit is demanded by supplier from a customer. However. Unconditional order means it does not require any action by the bearer to cash the bill of exchange.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. accasupport.3 Bill of exchange Bills of exchange are used primarily in international trade. Bill of laden can be used as evidence of transfer of goods to customer. It is not frequently used credit instrument.Financial Management | Page 51 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 10. accasupport. Issuing letter of credit is costly and time-consuming process. Business Analysis.2 Export Factoring Export factoring can be used to reduce risk of foreign trade. Ebusiness / Ecommerce Guide Free Download in f t +1 . for deals between a supplier in one country and a customer in another. Bank guarantees to a beneficiary (supplier) to pay specified sum of money on completion of sales in accordance with agreed term and conditions on behalf on his client (customer). 10. 10.

The ordering cost is expected to be $400 per order while the holding cost is expected to be $512 per unit per year. whether orders are made by the traditional method or using the economic ordering quantity model. WQZ Co forecasts that demand for Product KN5 will be 160. It is given to those who pay early within specified period before usual credit period. Barter trade does not involve goods in exchange of promise to supply goods. Performance Management. Early settlement discount is given to reduce finance cost of trade receivables and improve working capital cycle. accasupport. The cost of insurance is called premium.com WQZ Co is considering making the following changes in the area of working capital management: Inventory management It has been suggested that the order size for Product KN5 should be determined using the economic order quantity model (EOQ). death.2.Financial Management | Page 52 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 10. deliberate non-payment etc.com Early settlement discount is given as percentage of sales.000 units of Product KN5 will be maintained. 10. accasupport.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.000 units in the coming year and it has traditionally ordered 10% of annual demand per order. Goods are exchanged (despatched) at the same time so it reduces the risk of bad debt.6 Barter Trade Barter trade is receiving goods rather than cash in return for selling goods. Business Analysis. Ebusiness / Ecommerce Guide Free Download accasupport. It covers the risk of default due to bankruptcy. 11 Calculating & Commenting Early Settlement Discounts Early settlement discount is different from trade discount. A buffer inventory of 5.5 Credit Insurance Credit insurance is risk management product used to used cover the risk of default by foreign customers. It can be continuous long-term contract or one off transaction insure against specific customer.com in f t +1 .2. Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

It is expected that administration and operating cost savings of $753. The company has a cost of short-term finance of 55% per year. Business Analysis. what is the maximum early settlement discount that could be offered? Currently customers take 75 days to repay their debts. accasupport. through improved operational procedures.000 per year will be made after improving operational procedures and introducing the early settlement discount. maintain a maximum average payment period of 60 days for credit customers who do not take the discount. It is expected that administration and operating cost savings of $753000 per year will be made after improving operational procedures and introducing the early settlement discount. Assuming that only 25% of customers take the early settlement discount. Credit sales are not expected to change as a result of the changes in receivables management.com ( ) ( ) Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. It is expected that 25% of credit customers will take the discount if it were offered. Performance Management. Credit sales of WQZ Co are currently $876 million per year and trade receivables are currently $18 million. Required: Calculate and comment on whether the proposed changes in receivables management will be acceptable. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 53 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Receivables management WQZ Co could introduce an early settlement discount of 1% for customers who pay within 30 days and at the same time.

5 days. Business Analysis. $12.com trade receivable level will require less working capital resulting in savings in finance cost.com $ 297.Financial Management | Page 54 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Introduction of early settlement discount will result in 25% of customers paying within 30 days.5 days will result in decrease in trade receivable level by $5.4m ($18m-$12.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Reduction in trade receivable turnover from 75 to 52. Performance Management. Savings in finance cost of trade receivables per year accasupport. Therefore. trade receivables incurs finance cost. decrease in accasupport.6m of cash will remain invested in trade receivables and working capital during the year according to revised trade receivable days of 52.6m). it means those customers that take 60 day on average will be 75%. As discussed earlier. Cost of early settlement discount is finance cost for the organization rather than admin or selling and distribution expense. because it is given for reducing the cost of financing trade receivables. Ebusiness / Ecommerce Guide Free Download in f t +1 .000 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

12 Discounts from Suppliers ZPS Co places monthly orders with a supplier for 10.000 accasupport. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. which ZPS Co meets.Financial Management | Page 55 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS $ Savings in administration and operating cost per year 753. Assume that there are 365 days in the year and that ZPS Co can borrow short-term at 45% per year.000 or 4. Performance Management.000 components. or a discount of 36% on orders of 30. Business Analysis. maximum early settlement discount that could be offered is ( ) It is because sales revenue could be lowered by 1.000) Total benefit of early settlement discount per year 831. The supplier has offered either a discount of O5% for payment in full within 30 days. If the bulk purchase discount is taken.8% at max after. The cost of ordering is $200 per order. which is ( ) Then.com Maximum Early Settlement Discount Maximum early settlement discount should be the rate at which savings from giving early settlement discount becomes zero. The current terms are payment in full within 90 days.000 components that are used in its manufacturing processes. and the cost per component is $750. Annual demand is 120.000 Finance cost of early settlement discount (219.050. which savings will be zero. while the cost of holding components in inventory is $100 per component per year. the cost of holding components in inventory would increase to $220 per component per year due to the need for a larger storage facility.000 or more components. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. If 25% of credit sales will receive early settlement discount.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Trade payable is usually used as free source of finance because suppliers generally do not charge interest for late payment. Short-term finance will now be used for refinancing working capital. Ebusiness / Ecommerce Guide Free Download in f t +1 .500 Refinancing cost of working capital (6. It is considered as finance income. Performance Management. Reduction in trade payables will require the use of other source of finance to makeup the short fall in working capital. Organization will be better by not taking early settlement discount. accasupport. Obtaining early settlement discount will result in savings of $4. Business Analysis.500 per year. $ Savings from early settlement discount 4. which will give rise to financing (interest) cost.657) Net benefit/ cost of early settlement discount (2.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT.157) Increase in financing cost exceeds benefits/savings from early settlement discount.Financial Management | Page 56 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Required: Calculate if ZPS Co will benefit financially by accepting the offer of the early settlement discount.

Business Analysis.2 Calculating Economic Order Quantity Formula (given in the formula sheet): √ Where Co = ordering cost per order CH = holding cost per unit (for the duration of demand) D = total demand of the period PKA Co is a European company that sells goods solely within Europe. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 57 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS 13 Economic Order Quantity (EOQ) Model 13. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Optimal or Economic Order Quantity (EOQ) Economic order quantity is the quantity (order size) at which combine cost of inventory ordering and holding is minimized. Diagram: Ordering cost Total cost accasupport.com Holding cost EOQ Reorder quantity 13. The recently-appointed financial manager of PKA Co has been investigating the working capital management of the company and has gathered the following information: Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

Required: Calculate the cost of the current ordering policy and determine the saving that could be made by using the economic order quantity model.Financial Management | Page 58 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Inventory management The current policy is to order 100. it is not possible to place 0. Each unit will require of holding cost per year. However. which is the average of inventory getting at lower and higher levels during the year.000 units. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. You should assume a 50-week year and that demand is constant throughout the year. Total cost under current ordering policy: accasupport.000) orders to fulfil annual demand of 625.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis.000 units. while the cost of holding a unit in stores is €050 per unit per year.000 units will require 6. Orders are received two weeks after being placed with the supplier. accasupport.000/100.000 units.000 units when the inventory level falls to 35.com Ordering inventory in batches of 100.25 order in practice. Performance Management. Both costs are expected to be constant during the next year. Ebusiness / Ecommerce Guide Free Download in f t +1 . The cost of placing and processing an order is €250.25 (625.com It is assumed that always half of the inventory ordered will be held in warehouse. Forecast demand to meet production requirements during the next year is 625.

000 (35. Performance Management. Business Analysis. Buffer stock is held in the warehouse during whole year. If supplier takes 2 weeks.500 (625.000-25.Financial Management | Page 59 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Inventory usage per week is 12. 10. then inventory should be ordered when 25.000 (12.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.000 units of inventory has incurred Total cost under EOQ model: accasupport.com √ √ ( )( ) Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Each unit of buffer of stock will incur holding cost. supplier may delay delivery or unexpected demand can arise during the lead-time. Therefore.000/50) units.000) units as buffer (safety) stock for unexpected situation. organization has kept 10. Ebusiness / Ecommerce Guide Free Download in f t +1 . Therefore. However.500 x 2) units remaining in stock to prevent stock outs.

and the cost per component is $750.000/25. 14 Optimal Reorder Quantity with Bulk Purchase Discount EOQ cannot be used when supplier offers bulk purchase discount for ordering above certain quantity. If. We must find out economical order size through trial and error.com ZPS Co places monthly orders with a supplier for 10.25 orders to 25 (625. Business Analysis. supplier offers different discount rate for different order size we have to calculate total cost of purchasing for each order size. which ZPS Co meets. Formula: accasupport. ( ( ) ) Ordering as per EOQ resulted in decrease in holding cost of ( ). Performance Management. The cost of Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Ebusiness / Ecommerce Guide Free Download in f t +1 .000 components.Financial Management | Page 60 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Orders in smaller quantity than under current ordering policy increased ordering cost by ( ) because of more frequent ordering from 6.000 components that are used in its manufacturing processes.000) orders. Annual demand is 120. The current terms are payment in full within 90 days. It is due to reduction in average inventory level.

while the cost of holding components in inventory is $100 per component per year.Financial Management | Page 61 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS ordering is $200 per order. Business Analysis.000 or more components. Total purchase cost of current order size at 10.6% on orders of 30. The supplier has offered a discount of 3. Assume that there are 365 days in the year and that ZPS Co can borrow short-term at 45% per year.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. the cost of holding components in inventory would increase to $220 per component per year due to the need for a larger storage facility. If the bulk purchase discount is taken. Required: Calculate if ZPS Co will benefit financially by accepting the offer of the bulk purchase discount.000 units: Buy Full Financial Management Book (380 ±) at ACCASUPPORT.000 units : Total purchase cost of revised order size at 30. Ebusiness / Ecommerce Guide Free Download in f t +1 . Performance Management.

1 Benefits JIT reduces inventory-holding costs. in practice. it increases inventoryordering costs but these are not so high because of application of information technology.com 15.600901. inventory level is assumed $0. JIT saves cost of inventory obsolesces. Business Analysis. Inventory may become obsolete or out of fashion as people tastes and behaviour changes over time. Floor area is valuable asset of the organization. Ebusiness / Ecommerce Guide Free Download in f t +1 . However. fire.000 (907. some butter stock is maintained to meet unexpected demand. Cost of stock outs far more exceeds benefits in such sectors. Cash invested in inventory can be used to earn interest on short-term investments.2 Limitations JIT is not suitable for organizations operating in health and safety and rescue services sector.Financial Management | Page 62 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS ( ) ( ) Savings due to obtaining bulk purchase discount is $6. JIT results in no or little inventory level. water. However. Ideally. It means inventory should only be produced or purchase when there is customer available for it. 15 Just in Time (JIT) Just in time is modern inventory management philosophy. which can be used for producing other products.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. storm etc. Inventory possesses a risk of theft and deterioration due to dust.400) per year. Inventory occupies floor area. 15. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. accasupport. Inventory does not generate revenue until it is sold. Performance Management. Some kind of inventory is perishable in nature such as groceries and chemicals.

cost of holding inventory is justified against the risk involved in stock outs. Performance Management. At worst. Business Analysis. customer may turn to buy competitors product and may not return. Ebusiness / Ecommerce Guide Free Download in f t +1 . Efficient operation of JIT depends on reliable suppliers. Buy Full Financial Management Book (380 ±) at ACCASUPPORT. location and distance of organization premises from suppliers and infrastructure available for communication and delivery of goods.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. In this situation.Financial Management | Page 63 of 108 Chapter 4: MANAGEMENT OF WORKING CAPITAL ELEMENTS Example: Stock out of life saving drug in a hospital can be disastrous. Organization may not be able to meet unexpected demand and suffer lost sales from both existing and potential customer.

no 65 65 65 65 Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 64 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 5: DETERMINING WORKING CAPITAL NEEDS & FUNDING STRATEGIES Sub S. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 1 2 3 4 Headings Headings (click the cross-ref below for easy navigation) Cash Management Models Funding Working Capital Requirement Level of Investment in Working Capital Symptoms of Overtrading Pg.

1 Length of Working Capital Cycle 3.Financial Management | Page 65 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Cash Management Models 1.1. Performance Management. Business Analysis.2 Increase in Trade Receivable Turnover Buy Full Financial Management Book (380 ±) at ACCASUPPORT.1 Symptoms of Overtrading 4.1 Benefits 1. Ebusiness / Ecommerce Guide Free Download in f t +1 .1 Working Capital to Sales Ratio 4.3 Fluctuating Assets 2.5 Aggressive Working Capital Policy 2.2 Limitations 2 Funding Working Capital Requirement 2.3 Level of Risk Acceptable to Organization 3.4 Industry in Which Organization Operates 4 Overtrading & Undertrading 4.1 Non-Current Assets 2.1 Benefits 1.2.2 Limitations 1.2 Permanent Assets 2.2.2 Terms of Trade 3.1.4 Matching Policy 2.6 Conservative Working Capital Policy 3 Level of Investment in Working Capital 3.1 Miller-Orr Model 1.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1.2 Baumol Model 1.1.

Financial Management | Page 66 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 4.6 Liquidity Ratios Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .1.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.4 Increase in Trade Payable Turnover 4.5 Overdraft 4. Performance Management.1. Business Analysis.1.3 Increase in Inventory Turnover 4.1.

Monitoring & Reviewing Investments Pg.no 1 Capital Investment Process 1 Capital Investment Process 1.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 67 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.5 Implementing. Performance Management.4 Approving Investment Proposals 1.Financial Management | Page 67 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 6: THE NATURE OF INVESTMENT DECISIONS & THE APPRAISAL PROCESS Sub Headings Headings (click the cross-ref below for easy navigation) S.1 Identifying Investment Opportunities 1. Ebusiness / Ecommerce Guide Free Download in f t +1 . Business Analysis.2 Screening Investment Proposals 1.3 Analysing & Evaluating Investment Proposals 1.

Business Analysis.Financial Management | Page 68 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 7: NON DISCOUNTED CASH FLOW TECHNIQUES Sub Headings S.1 Benefits & Limitations of Payback Period Pg.no Headings (click the cross-ref below for easy navigation) 1 Accounting Rate of Return (ARR) 2 Payback Period 1 Accounting Rate of Return (ARR) 1. Ebusiness / Ecommerce Guide Free Download in f t +1 .1 Benefits & Limitations of ARR 2 Payback Period 2. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 68 68 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

Financial Management | Page 69 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 8: DISCOUNTED CASH FLOW (DCF) TECHNIQUES Sub S. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 .no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Headings Headings (click the cross-ref below for easy navigation) Time Value of Money Present Value (PV) Discount Rate Discounting Annuity Perpetuity Conventional & Non-conventional Cash flows Net Present Value (NPV) Benefits & Limitations of Net Present Value (NPV) Internal Rate of Return (IRR) Benefits & Limitations of Internal Rate of Return (IRR) IRR & Non-Conventional Cash flows Discounted Payback Period Commenting on Investment Proposals Free Cash Flows Pg. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 70 70 70 70 70 70 70 70 70 71 71 71 71 71 71 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Inflation or Deflation 1. Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 .1 Performa for Calculating NPV 9 Benefits & Limitations of Net Present Value (NPV) 9.1 Calculating Annuity Factor 6 Perpetuity 7 Conventional & Non-conventional Cash flows 8 Net Present Value (NPV) 8.3 Risk 2 Present Value (PV) 3 Discount Rate 3.1 Inflation Rate 3.1 Calculating Discount Factor 5 Annuity 5.Financial Management | Page 70 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Time Value of Money 1.2 Interest Rate 3.2 Limitations Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis.3 Weighted Average Cost of Capital (WACC) 4 Discounting 4.2 Postponing Consumption 1.1 Benefits 9.

1 Benefits 11. Performance Management.2 Limitations 12 IRR & Non-Conventional Cash flows 13 Discounted Payback Period 14 Commenting on Investment Proposals 15 Free Cash Flows Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 71 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 10 Internal Rate of Return (IRR) 11 Benefits & Limitations of Internal Rate of Return (IRR) 11.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis.

no 73 73 73 73 73 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.no 1 2 3 4 5 Headings Headings (click the cross-ref below for easy navigation) Discounting & Timing Of Cash Flows Capital & Revenue Cash Flows Nominal & Real Cash flows Nominal & Real Discount Rate Cash flows & Discount Rate Pg. Business Analysis.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.Financial Management | Page 72 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 9: ALLOWING FOR INFLATION & TAXATION IN DCF Sub S. Ebusiness / Ecommerce Guide Free Download in f t +1 .

7.8 Financial Cash Flows 3 Nominal & Real Cash flows 4 Nominal & Real Discount Rate 5 Cash flows & Discount Rate Buy Full Financial Management Book (380 ±) at ACCASUPPORT.Financial Management | Page 73 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Discounting & Timing Of Cash Flows 2 Capital & Revenue Cash Flows 2.4 Tax Payments 2.2 Variable Cost 2.1 Sales Revenue 2.4 Tax Savings on Capital Allowance 2.2 Initial Investment 2.7.3 Residual Value 2.7.5 With No Delay in Tax Payment 2.6 With Delay in Tax Payment 2. Ebusiness / Ecommerce Guide Free Download in f t +1 .7 Revenue Cash Flows 2.5 Working Capital Investment 2.3 Project Specific Fixed Cost 2.7.1 Capital Cash Flows 2. Performance Management. Business Analysis.7.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.

2 Uncertainty 3 Sensitivity Analysis 3.1 Benefits 3.2 Benefits of Expected Values 4.6 Probability of Specific Condition Buy Full Financial Management Book (380 ±) at ACCASUPPORT.1 Expected Values 4.no 1 2 3 4 Headings Headings (click the cross-ref below for easy navigation) Adjusting Risk for Investment Appraisal Risk & Uncertainty Sensitivity Analysis Probability Analysis Pg.no 74 74 74 74 1 Adjusting Risk for Investment Appraisal 2 Risk & Uncertainty 2.3 Limitations of Expected Values 4. Business Analysis.4 Combine Probability 4. Ebusiness / Ecommerce Guide Free Download in f t +1 .2 Limitations 4 Probability Analysis 4.Financial Management | Page 74 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 10: ADJUSTING FOR RISK & UNCERTAINTY IN INVESTMENT APPRAISAL Sub S.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Risk 2.5 Probability of Negative & Positive Outcome 4. Performance Management.

no 76 76 76 76 76 77 77 77 78 Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.no 1 2 3 4 5 6 7 8 9 Headings Headings (click the cross-ref below for easy navigation) Lease Types of Lease Buying Lease or Buy Approaches Investment Appraisal Asset Replacement Decisions Capital Rationing Investment Decisions & Capital Rationing Relaxing Capital Rationing Pg. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 75 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 11: SPECIFIC INVESTMENT DECISIONS Sub S. Business Analysis.

1 Benefits for Lessee 2. Performance Management.2 Lessor & Lessee 1.Financial Management | Page 76 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Lease 1.1 Timing of Lease Rental Payments 1.1. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 .2 Limitations for Lessee 2.2 Benefits for Lessee 2.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Finance Lease 2.5 Treatment of Operating Lease 3 Buying Formula: 3.4 Limitations of Lease 2 Types of Lease 2.3 Benefits of Lease 1.1 Benefits 3.4.3 Operating Lease 2.3 Limitations for Lessee 2.2 Limitations 4 Lease or Buy 5 Approaches Investment Appraisal Buy Full Financial Management Book (380 ±) at ACCASUPPORT.4 Benefits & Limitations of Operating Lease 2.1 Benefits & Limitations of Finance Lease 2.1.4.1.2 Treatment of Financial Lease 2.

1 Single Period Capital Rationing 8.2. Performance Management.3 Equivalent Annual Cost (EAC) 6.1.2 Soft Capital Rationing 8 Investment Decisions & Capital Rationing 8.1 Competitive Advantage 6.3 Tax Savings 6.5 Limitations 6.1 Non-Postponing Projects Required: 8.3 Postponing Projects Buy Full Financial Management Book (380 ±) at ACCASUPPORT.1.2 Resale Value 6.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Efficiency & Economy 6.1.2 Compatibility 6.1 Financial Factors to Consider 6.1.1.1.1.6 Equivalent Annual Benefit (EAB) 7 Capital Rationing 7.1 Divisible Projects 8.1.1 Hard Capital Rationing 7.1. Ebusiness / Ecommerce Guide Free Download in f t +1 .2 Non-Financial Factors to Consider 6. Business Analysis.1.Financial Management | Page 77 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 6 Asset Replacement Decisions 6.2.2 Limitations of Profitability Index 8.4 Benefits 6.

5 Government Grant 9. Business Analysis.2 Joint Venture 9.1.1.Financial Management | Page 78 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 8. Performance Management.1 Outsourcing 9.3 Franchise 9. Ebusiness / Ecommerce Guide Free Download in f t +1 .3 Mutually Exclusive Projects (Non-Postponing Projects) 9 Relaxing Capital Rationing 9.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.6 Leasing Buy Full Financial Management Book (380 ±) at ACCASUPPORT.2 Non Divisible Projects (Non-Postponing Projects) 8.4 Working Capital Management 9.

Performance Management.no 1 2 3 4 Headings Headings (click the cross-ref below for easy navigation) Short Term Sources of Finance Long Term Sources of Finance Role of Intermediaries Sources of Finance & Investment Appraisal Pg.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 79 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 12: SHORT & LONG TERM FINANCE Sub S. Business Analysis.no 80 80 81 81 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

4 Limitations Buy Full Financial Management Book (380 ±) at ACCASUPPORT.5 Preference Share Capital 2.2 Retained Earnings 2.1 Cumulative & Non-Cumulative Preference Shares 2.4.4 Right Issue 2.2 Convertible & Non-Convertible Preference Shares 2.3 Short Term Loan 1. Performance Management.4 Ways of Raising Equity Finance 2.7 Summary 2.5.4 Operating Lease 2 Long Term Sources of Finance 2.Financial Management | Page 80 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Short Term Sources of Finance 1. Business Analysis.4.5.4.1 Account Payables 1.4.4.3.3 Benefits 2.1 Finance Lease 2.2 Overdrafts 1.1 Benefits 2.2 Placing 2.4.4.1 Pre-Emption Right 2.3.5. Ebusiness / Ecommerce Guide Free Download in f t +1 .4.3 Floatation 2.2 Limitations 2.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Initial Public Offer (IPO) 2.3 Equity Finance 2.5.5 Benefits 2.4.6 Limitations 2.

2 Issue or Redemption at Discount 2.8. Performance Management.1.2 Benefits Limitations 3 Role of Intermediaries 4 Sources of Finance & Investment Appraisal 4.1 Loan Notes (Bonds or Debenture) 2.8 Types of Loan Notes 2.1 Redeemable Loan Notes 2.8.3 Volatility Buy Full Financial Management Book (380 ±) at ACCASUPPORT.2 Duration 4.10.1 2.8.1 Risk 4.5 Zero Coupon Bond 2.1.10 Sale & Lease Back 2.2 Irredeemable Loan Notes 2.6.10.3 Issue or Redemption at Premium 2.2 Limitation 2.7.6 Summary 2.6 Debt Finance 2.1.7.9 Long Term Bank Loans 2.4 Deep Discount Bonds 2.1 Benefits 2.7 Ways of Raising Of Debt Finance 2.3 Convertible Loan Notes 2.8.8.8.Financial Management | Page 81 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 2.7.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis.1 Par Value 2.7.6. Ebusiness / Ecommerce Guide Free Download in f t +1 .

Business Analysis. Performance Management.Financial Management | Page 82 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 4. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.4 Trend Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

no 1 2 3 4 Headings Headings (click the cross-ref below for easy navigation) Dividend Policy Factors Affecting level of Dividend Script Dividend Ex-dividend or Cum-divided Share Price Pg. Business Analysis.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Ebusiness / Ecommerce Guide Free Download in f t +1 . Performance Management.no 84 84 84 84 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.Financial Management | Page 83 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapters13: INTERNAL SOURCES OF FINANCE & DIVIDEND POLICY Sub S.

Ebusiness / Ecommerce Guide Free Download in f t +1 .5 Gearing 2.1 Benefits 3.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.2 Consistency 2.1 Liquidity 2.6 Clientele Effect 1.4 Transaction Cost 1.6 Signalling Effect 3 Script Dividend 3.7 Signalling Effect 1. Business Analysis.2 Traditional View 1.2 Limitations 4 Ex-dividend or Cum-divided Share Price Buy Full Financial Management Book (380 ±) at ACCASUPPORT.5 Preference for Dividends 1.3 Financing Needs 2.Financial Management | Page 84 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Dividend Policy 1.4 Legal Restrictions 2. Performance Management.8 Financing 2 Factors Affecting level of Dividend 2.1 Miller & Modigliani Theory 1.3 Tax 1.

no 86 86 86 86 Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 85 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 14: GEARING & CAPITAL STRUCTURE CONSIDERATIONS Sub Headings S. Performance Management.no Headings (click the cross-ref below for easy navigation) 1 Evaluating Sources of Finance 2 Theoretical Ex-Right Share Price 3 Calculating Theoretical Ex-Right Share Price 4 Impact of Right Issue on Shareholders Wealth Pg.

3 Lapse Buy Full Financial Management Book (380 ±) at ACCASUPPORT.1 Subscribe 4. Ebusiness / Ecommerce Guide Free Download in f t +1 . Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 86 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Evaluating Sources of Finance 2 Theoretical Ex-Right Share Price 3 Calculating Theoretical Ex-Right Share Price 4 Impact of Right Issue on Shareholders Wealth 4. Business Analysis.2 Renounce 4.

Financial Management | Page 87 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 15: FINANCE FOR SMALL & MEDIUM SIZED ENTITIES (SMEs) Sub S. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.no 88 88 88 88 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.no 1 2 3 4 Headings Headings (click the cross-ref below for easy navigation) SMEs (Small & Medium Sized Entities) Sources of Finance for SMEs Islamic Finance Islamic Financial Instruments Pg.

Business Analysis.1 Business Angels 2.7 Musharakah (Joint Venture) 4.Financial Management | Page 88 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 SMEs (Small & Medium Sized Entities) 2 Sources of Finance for SMEs 2.3 Mudarabah 4.6 Ijarah-Wal-Iqtina (Finance Lease) 4.3 Leasing 2.2 Musharakah (Venture Capital) 4.2 Venture Capitalist (Joint Venture) 2.1.4 Ijarah (Operating Lease) 4.2 Dain 4 Islamic Financial Instruments 4.5 Government Aid 2.5 Ijarah Thumma Al Bai (Hire Purchase) 4.1 Limitations of Riba 3. Performance Management.8 Sukuk (Debt Finance) Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.4 Borrowing From Family & Friends 2.6 Bank Loan 3 Islamic Finance 3.1 Murabaha (Trade credit) 4.1 Riba 3.

no 90 90 90 90 90 91 91 91 91 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.Financial Management | Page 89 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 16: ESTIMATING COST OF CAPITAL Sub S.no 1 2 3 4 5 6 7 8 9 Headings Headings (click the cross-ref below for easy navigation) Weighted Average Cost of Capital (WACC) Calculating Market Value of Equity & Debt Cost of Equity Systematic Risk & Non Systematic Risk Capital Asset Pricing Model (CAPM) Gearing & Ungearing Betas Benefits & Limitations of CAPM Calculating Cost of Debt Calculating Weighted Average Cost of Capital Pg. Ebusiness / Ecommerce Guide Free Download in f t +1 . Business Analysis.

3.2 Limitations 3 Cost of Equity 3.1 Systematic Risk 4.2.4 Assumptions (also limitations) 4 Systematic Risk & Non Systematic Risk 4.2 Limitations 3. Ebusiness / Ecommerce Guide Free Download in f t +1 .2.2 Non Systematic Risk 5 Capital Asset Pricing Model (CAPM) 5.2.1.Financial Management | Page 90 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Weighted Average Cost of Capital (WACC) 2 Calculating Market Value of Equity & Debt 2.1 Benefits & Limitations of WACC 2.2 Calculating Growth Rate 3.1.1 Average Growth Rate 3.1 Risk Free Rate of Return 5.1 Benefits 3.1 Limitations 3.3.2 Market Rate of Return 5.1 Benefits 2.1 Dividend Growth Model (DGM) 3.3 Equity Risk Premium ( ) Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis.1.2.2.2 Gordon’s Growth Rate 3.3 Benefits & Limitations of DGM 3.1 Limitations 3. Performance Management.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.

Performance Management.2 Limitations 8 Calculating Cost of Debt 9 Calculating Weighted Average Cost of Capital Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Business Analysis.1 Benefits 7.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Ebusiness / Ecommerce Guide Free Download in f t +1 .4 Equity Beta 6 Gearing & Ungearing Betas 7 Benefits & Limitations of CAPM 7.Financial Management | Page 91 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 5.

no 1 2 3 4 5 6 Headings Headings (click the cross-ref below for easy navigation) Financial Risk & Business Risk WACC & Investment Appraisal CAPM & Investment Appraisal WACC & Capital Structure Pecking Order Theory Impact of Sources of Finance on Key Ratios Pg. Performance Management.no 93 93 93 93 93 93 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.Financial Management | Page 92 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 17: RELATIONSHIP B/W COST OF CAPITAL. Business Analysis. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. CAPITAL STRUCTURE & INVESTMENTS Sub S.

4 Preference Shares 5.1 Assumptions 4.1 Financial Risk 1.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 93 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Financial Risk & Business Risk 1.1 Return of Investment (ROI) Buy Full Financial Management Book (380 ±) at ACCASUPPORT.2 Miller & Modigliani (M&M) Theory 4.1 Conclusion 4 WACC & Capital Structure 4. Business Analysis.2 Business Risk 2 WACC & Investment Appraisal 3 CAPM & Investment Appraisal 3.1.1 Traditional View 4.1 Retained Earnings 5.5 Equity 6 Impact of Sources of Finance on Key Ratios 6.4 Conclusion 5 Pecking Order Theory 5. Ebusiness / Ecommerce Guide Free Download in f t +1 .3 Convertible Debt 5.1.2 Debt 5.1 Assumptions 4. Performance Management.1 Profitability Ratios 6.3 Market Imperfection Theory 4.2.

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no 1 2 3 4 5 6 7 8 Headings Headings (click the cross-ref below for easy navigation) Business Valuation Net Assets Valuation Model Price Earnings (P/E) Ratio Method Earnings Yield Valuation Method Dividend Valuation Model (DVM) Valuation of Debt & other Financial Assets Evaluating Financial Performance Preparing Forecast Financial Statements Pg.no 96 96 96 96 96 96 97 97 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 95 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 18: BUSINESS VALUATION TECHNIQUES Sub S. Performance Management. Ebusiness / Ecommerce Guide Free Download in f t +1 . Business Analysis.

1 Goodwill 2.1 Benefits 2.1.2 Limitations 4 Earnings Yield Valuation Method 5 Dividend Valuation Model (DVM) 5.2 Assets & Liabilities Included 2.3.1 Benefits 5.2 Limitations 6 Valuation of Debt & other Financial Assets 6.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1 Redemption Value Buy Full Financial Management Book (380 ±) at ACCASUPPORT.3.Financial Management | Page 96 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Business Valuation 2 Net Assets Valuation Model 2.1 Benefits & Limitations of DVM 5.1 Assets Excluded 2.1.1. Performance Management.2 Tangible Assets 2.3 Benefits & Limitations 2.1 Benefits 3.2 Development Expenditure 2.1.2 Limitations 3 Price Earnings (P/E) Ratio Method 3.2. Copyright & Patents 2.3 Contingent Assets 2.2. Business Analysis.1 Brand. Ebusiness / Ecommerce Guide Free Download in f t +1 .2.1.3 Contingent Liabilities 2.

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1.2 Past Dividend Payments 3. Ebusiness / Ecommerce Guide Free Download in f t +1 .1.no 1 2 3 Headings Headings (click the cross-ref below for easy navigation) Features of Efficient Markets Benefits of Efficient Markets Efficient Market Hypothesis Pg. Business Analysis.2 Semi Strong Form Efficient 3.1 Weak Form Efficient 3.1. Performance Management.3 Past Reputation 3.1 Published Financial Statements 3.no 98 98 98 1 Features of Efficient Markets 2 Benefits of Efficient Markets 3 Efficient Market Hypothesis 3.3 Strong Form Efficient Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.Financial Management | Page 98 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 19: EFFICIENT MARKET HYPOTHESIS Sub S.

Business Analysis.Financial Management | Page 99 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 20: BASICS OF FINANCIAL RISK MANAGEMENT Sub S. Ebusiness / Ecommerce Guide Free Download in f t +1 . Performance Management.no 1 2 3 4 5 6 7 8 Headings Headings (click the cross-ref below for easy navigation) Direct Vs Indirect Quote Buying & Selling Rate Agreement & Settlement Date Foreign Exchange Risk Types of Foreign Exchange Risk Managing Foreign Exchange Risk Netting Lead & Lag Payment Pg.no 100 100 100 100 100 100 100 100 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.

1 Direct Quote 2.1 Direct Quote 1.2 Invoicing in Home Currency 6.2 Indirect Quote 2 Buying & Selling Rate 2.3 Matching 7 Netting 8 Lead & Lag Payment Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .1 Settlement on Net Basis 6.2 Settlement Date 4 Foreign Exchange Risk 5 Types of Foreign Exchange Risk 5.1 Transaction Risk 5.1 Agreement Date 3.Financial Management | Page 100 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Direct Vs Indirect Quote 1. Business Analysis.2 Indirect Quote 3 Agreement & Settlement Date 3.2 Translation Risk 5.3 Economic Risk 6 Managing Foreign Exchange Risk 6.1 Hedging 6.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.1. Performance Management.

no 1 2 3 4 5 6 7 8 9 10 Headings Headings (click the cross-ref below for easy navigation) Step by Step Solution Spot & Forward rate Inflation Rate Parity Theory Interest Rate Parity Theory Forward Contract Hedge Future Contract Hedge Money Market Hedge Currency Option Currency Swap Derivative Pg. Performance Management.Financial Management | Page 101 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK Chapter 21: HEDGING TECHNIQUES FOR FOREIGN CURRENCY RISK Sub S. Ebusiness / Ecommerce Guide Free Download in f t +1 .COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Business Analysis.no 102 102 102 102 102 102 103 103 103 103 Buy Full Financial Management Book (380 ±) at ACCASUPPORT.

1.1 Spot Rate 2.4 Basis Risk 6.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.3 Benefits 5.2 Scenario 4 (Gain on Forward Contract) 5. Performance Management.2. Business Analysis.1 Scenario 1 (Gain on Forward Contract) 5.1.5 Tick 6.6 Agreement Date Buy Full Financial Management Book (380 ±) at ACCASUPPORT.2 Forward Rate 3 Inflation Rate Parity Theory 4 Interest Rate Parity Theory 5 Forward Contract Hedge 5.3 Contract Size 6.1 Future Market 6. Ebusiness / Ecommerce Guide Free Download in f t +1 .2 Contract Price 6.Financial Management | Page 102 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 1 Step by Step Solution 2 Spot & Forward rate 2.1 Scenario 3 (Loss on Forward Contract) 5.2.4 Limitations 6 Future Contract Hedge 6.2 Scenario 2 (Loss on Forward Contract) 5.1 Receipt 5.2 Payment 5.

Financial Management | Page 103 of 108
Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

6.7 Settlement Date 6.8 Benefits 6.9 Limitations 7 Money Market Hedge 7.1 Step By Step Process 7.1.1 Money Market Hedge for Receipt 7.1.2 Money Market Hedge for Payment 7.2 Benefits 7.3 Limitations 8 Currency Option 8.1 Benefits 8.2 Limitations 9 Currency Swap 10 Derivative

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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

Chapter 22:

HEDGING TECHNIQUES FOR INTEREST RATE RISK
Sub S.no 1 2 3 4 5 6 7 8 9 10 11 Headings Headings (click the cross-ref below for easy navigation) Interest Rate Risk Types of Interest Rate Risk Managing Interest Rate Risk Forward Rate Agreements (FRAs) Future Contracts Interest Rate Option Interest Rate Swap Effects of Interest Rate on Performance Factor Affecting Interest Rates Yield Curve Macroeconomic Factors Affecting Interest Rates Pg.no 105 105 105 105 105 105 105 105 106 106 106

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Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK

1 Interest Rate Risk 2 Types of Interest Rate Risk 2.1 Variable Interest Rate Risk 2.2 Basis Risk 2.3 Negative Gap 2.4 Positive Gap 2.5 Fixed Interest Rate Risk 3 Managing Interest Rate Risk 3.1 Matching 3.2 Smoothing 3.3 Hedging 4 Forward Rate Agreements (FRAs) 5 Future Contracts 6 Interest Rate Option 6.1 Cap 6.2 Floor 6.3 Collar 7 Interest Rate Swap 7.1 Switching Between Types of Interest Rate 7.2 Borrow Loan at More Competitive Terms 8 Effects of Interest Rate on Performance
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6 Balance Of Payments Buy Full Financial Management Book (380 ±) at ACCASUPPORT.5 Flexibility & Marketability 9. Ebusiness / Ecommerce Guide Free Download in f t +1 .7 Expectation Theory 9.1 Inflation 11.3 Volatile or Stable Economic Conditions 11.2 Real Return 11.3 Spread on Interest Rate 9.COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting.4 Size of Loan 9.1 Risk 9.9 Government Policy 10 Yield Curve 11 Macroeconomic Factors Affecting Interest Rates 11.Financial Management | Page 106 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK 9 Factor Affecting Interest Rates 9.4 Monetary Policy 11.2 Level of Gearing 9.8 Market Segmentation Theory 9. Business Analysis.5 Foreign Interest Rates 11.6 Liquidity Preference Theory 9. Performance Management.

COM | NEWSLETTERS | COMMENT | FORUMS | JOBS Management Accounting. Performance Management.com Buy Full Financial Management Book (380 ±) at ACCASUPPORT. Ebusiness / Ecommerce Guide Free Download in f t +1 .Financial Management | Page 107 of 108 Chapter 22: HEDGING TECHNIQUES FOR INTEREST RATE RISK RELATED eBOOKS Books Free Download Management Accounting F2 Performance Management F5 Financial Management F9 Governance. Risk & Ethics P1 Business Analysis P3 Ebusiness/Ecommerce/Make Money Online $£€ Click the hyperlinks above in underlined style to visit relevant webpage at http://accasupport. Business Analysis.

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