M18 Titman 2544318 11 FinMgt C18

Chapter 18
Working Capital
Management
Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Slide Contents
•  Learning Objectives
•  Principles Used in This Chapter
1.  Working Capital Management and the Risk-
Return Tradeoff
2.  Working Capital Policy
3.  Operating and Cash Conversion Cycle
4.  Managing Current Liabilities
5.  Managing the Firm’s Investment in Current
Assets
•  Key Terms
18-2
Learning Objectives
1.  Describe the risk-return tradeoff involved

in managing a firm’s working capital.
2.  Explain the principle of self-liquidating
debt as a tool for managing firm liquidity.
3.  Use the cash conversion cycle to measure
the efficiency with which a firm manages
its working capital.

18-3
Learning Objectives (cont.)
4.  Evaluate the cost of financing as a key

determinant of the management of a
firm’s use of current liabilities.
5.  Understand the factors underlying a
firm’s investment in cash and marketable
securities, accounts receivable, and
inventory.

18-4
Principles Used in This Chapter
•  Principle 2:
–  There is a Risk-Return Tradeoff.

18-5
18.1 Working
Capital Management
and the Risk-Return
Tradeoff

Working Capital Management and
the Risk-Return Tradeoff
•  Working capital management encompasses

the day-to-day activities of managing the
firm’s current assets and current liabilities.
Examples of working capital decisions
include:
–  How much inventory should a firm carry?
–  Who should credit be extended to?
–  Should inventories be bought on credit or cash?
–  If credit is used, when should payment be
made?

18-7
Measuring Firm Liquidity
•  The current ratio (current assets divided

by current liabilities) and net working
capital (current assets minus current
liabilities) are two popular measures of
liquidity.
•  Both measures of liquidity provide the

same information. However, current ratio
can be more easily used for comparing
firms.
18-8
Measuring Firm Liquidity (cont.)
•  Here the net working capital for two firms is very different
(due to differences in firm sizes) but the current ratio is
equal. Current ratio is a better measure of comparison of
liquidity among firms.
Firm A Firm B
Current Assets $100,000 $10,000
Current $50,000 $5,000
Liabilities
Net Working $50,000 $5,000
Capital
Current Ratio 2.0 2.0

18-9
Managing Firm Liquidity
•  Managing a firm’s liquidity requires

balancing the firm’s investments in
current assets in relation to its current
liabilities.
–  This can be accomplished by minimizing the
use of current assets by efficiently managing its
inventories and accounts receivable and by
seeking out the most favorable accounts
payable terms and monitoring its use of short-
term borrowing.

18-10
Risk-Return Tradeoff
•  Working capital decisions will change the

firm’s liquidity.
–  For example, a firm can enhance its profitability
by reducing its cash and marketable securities
as they yield low rates of return. However, the
firm will be exposed to a higher risk of default
or not being able to pay its bills on time if it
does not have adequate cash and marketable
securities.

18-11
Checkpoint 18.1
Measuring Firm Liquidity Ford Motor Company (F) suffered
along with all the U.S. automakers with the onset of the
recession in 2007. The following information from the firm’s
financial statements for 2008 and 2006 provide the
information needed to assess the firm’s liquidity (Note: all
figures below are in $000):

18-12
Checkpoint 18.1

18-13
Checkpoint 18.1

18-14
Checkpoint 18.1

18-15
Checkpoint 18.1: Check Yourself
•  Consider the effect on Ford’s liquidity of

the firm having the opportunity to enter
into a long-term financing arrangement to
borrow $20 million, which could be used to
reduce the firm’s 2008 accounts payable.
What would be the effect of this event on
the firm’s liquidity measures?

18-16
Step 1: Picture the Problem
•  Liquidity refers to the firm’s ability to pay

its bills in a timely fashion.
•  We can determine the firm’s liquidity by

comparing firm’s current assets (assets
that can be converted to cash in the
coming year) and current liabilities (bills
the firm must pay within the year).

18-17
Step 1: Picture the Problem (cont.)
•  We are given the following information:
2008 2006
Total Current $36,832,000 $49,244,000
Assets
Total Current $58,158,000 $52,544,000
Liabilities
Note:
$20 million transferred
to long-term debt.

18-18
Current Assets and Current Liabilities

70000000
60000000
50000000
40000000
30000000
20000000
10000000
2008 2006
2008
Current Current
Current 2006 Liabilities
Assets
Liabilities Current
Assets 18-19
Step 2: Decide on a Solution
Strategy
•  Firm’s liquidity can be measured by

computing the following two measures:
1. Current Ratio = Current Assets ÷ Current

Liabilities
2. Working capital = Current Assets – Current

Liabilities

18-20
Step 3: Solve
•  Current Ratio (2008)

= Current Assets ÷ Current Liabilities
= $36,832,000 ÷ $58,158,000
= 0.63

18-21
Step 3: Solve (cont.)
•  Working capital
= Current Assets – Current Liabilities
= $36,832,000 - $58,158,000
= -$21,326,000

18-22
Step 4: Analyze
•  The long-term financing arrangement for

$20 million improves the liquidity
measures by increasing the current ratio
from 0.47 to 0.63. However, it is still
below the 2006 current ratio of 0.94.

18-23
18.2 Working
Capital Policy

Working Capital Policy
•  Managing the firm’s net working capital

involves deciding on an investment
strategy for financing the firm’s current
assets and liabilities.
•  Since each financing source comes with

advantages and disadvantages, the
financial manager has to decide on the
optimal source for the firm.

18-25
The Principle of Self-Liquidating
Debt
•  This principle states that the maturity of

the source of financing should be matched
with the length of time that the financing
is needed.
•  Thus a seasonal increase in inventories

prior to Christmas season must be
financed with short-term loan or current
liability.

18-26
Permanent and Temporary Asset
Investments
•  Temporary investments in assets

include current assets that will be
liquidated and not replaced within the
current year.
–  For example, cash and marketable securities,

accounts receivable, and seasonal fluctuation in
inventories.

18-27
Permanent and Temporary Asset
Investments (cont.)
•  Permanent investments are composed

of investments in assets that the firm
expects to hold for a period longer than
one year.
–  For example, the firm’s minimum level of

current assets such as accounts receivable and
inventories, as well as fixed assets.

18-28
Spontaneous, Temporary, and
Permanent Sources of Financing
•  Spontaneous sources of financing arise

spontaneously out of the day-to-day
operations of the business and consist of
trade credit and other forms of accounts
payable (such as wages and salaries
payable, tax payable, interest payable).

18-29
Spontaneous, Temporary, and Permanent
Sources of Financing (cont.)
•  Temporary sources of financing

typically consist of current liabilities the
firm incurs on a discretionary basis. The
firm’s management must make an overt
decision to use temporary sources of
financing.
–  For example, unsecured bank loans,
commercial paper, short-term loans secured by
the firm’s inventories or accounts receivables.

18-30
•  Permanent sources of financing are

called permanent since the financing is
available for a longer period of time than a
current liability.
–  For example, intermediate term loans, bonds,

preferred stock and common equity.

18-31
18-32
•  Figure 18-2 illustrates the use of principle

of self-liquidating debt to guide a firm’s
financing decision.
–  We observe that the firm’s temporary or short-
term debt rises and falls with the rise and fall in
the firm’s temporary investment in current
assets.

18-33
18.3 Operating
and Cash
Conversion Cycles

Operating and Cash Conversion
Cycles
•  Operating and cash conversion cycles

indicate how effectively a firm has
managed its working capital.
•  The shorter these two cycles are, the more

efficient is the firm’s working capital
management.

18-35
Measuring Working Capital
Efficiency
•  The operating cycle measures the time

period that elapses from the date that an
item of inventory is purchased until the
firm collects the cash from its sale. If an
item is sold on credit, this date is when the
accounts receivable is collected.

18-36
Efficiency (cont.)
•  When the firm is able to purchase items of

inventory on credit, cash is not tied up for
the full length of its operating cycle. This is
known as the accounts payable deferral
period.

18-37
Efficiency (cont.)
•  Cash conversion cycle is shorter than

the operating cycle as the firm does not
have to pay for the items in its inventory
for a period equal to the length of the
account payable deferral period.

18-38
Figure 18.3 (Cont.)
18-39
Calculating the Operating and Cash
Conversion Cycle
•  Figure 18-3 calculations are based on the

following information:
–  Annual credit sales = $15 million
–  Cost of goods sold = $12 million
–  Inventory = $3 million
–  Accounts receivable = $3.6 million
–  Accounts payable outstanding = $ 2million

18-40
Conversion Cycle (cont.)
•  To calculate the operating cycle, we need

to compute the inventory conversion
period and the accounts receivable
collection period.

18-41
•  The inventory conversion period measures

the number of days it takes the firm to
convert its inventory to credit sales (i.e.
accounts receivable).
•  The second half of the operating cycle is

the number of takes it takes to convert
accounts receivable to cash (or average
collection period).

18-42
•  To calculate the cash conversion cycle, we

need to calculate the accounts payable
deferral period.

18-43
•  We have now calculated the following:
–  Inventory conversion period = 91 days

–  Average collection period = 61 days
–  Accounts payable deferral period = 61 days

18-44
•  Cash conversion cycle = 176 days – 61

days
= 116 days

18-45
Checkpoint 18.2
Analyzing the Cash Conversion Cycle
Financial information for the Dell Computer Corporation (DELL)
and Ford Motor Company (F) are found below:
Compute the operating cycle and cash conversion cycle for each
of these companies. You may assume for purposes of your
analysis that all of the firm sales are credit sales.
18-46
Checkpoint 18.2

18-47
Checkpoint 18.2

18-48
Checkpoint 18.2

18-49
•  If GM were to have an average collection

period of 18.89 days, an inventory
conversion period of 39.76 days and
accounts payable deferral period of 60.17
days, what would its operating and cash
conversion cycles be?

18-50
•  The operating and cash conversion cycle can be
visualized as shown below:

18-51
Strategy
•  The firm’s cash conversion cycle and

operating cycle are defined as follows:

18-52
Step 3: Solve
•  We are given the following for DELL:
–  Average collection period = 18.89 days

–  Inventory conversion period = 39.76 days
–  Accounts payable deferral period = 60.17 days

18-53
Operating Cycle = 39.76 days + 18.89 days

= 58.65 days

18-54
•  Cash conversion cycle

= 58.65 days – 60.17 days
= -1.52 days

18-55
Step 4: Analyze
•  We observe that the operating cycle for Dell is
58.65 days which indicates that 58.65 days elapse
from the date an item of inventory is purchased at
Dell until the firm collects the cash from its sale.
•  The cash conversion cycle is negative as Dell is

able to defer making payments on its account
payable for 60.17 days, which is longer than the
operating cycle.

18-56
18.4 Managing
Current Liabilities

Managing Current Liabilities
Current Liabilities
(debt obligations to be
repaid within one year)
Unsecured current Secured current

liabilities liabilities
(trade credit, unsecured (loans secured by specific
bank loans, commercial assts like inventories or
paper) accounts receivable)

18-58
Calculating the Cost of Short-term
Financing
•  When evaluating alternative sources of

financing, it is critical to consider the cost.
The cost of short-term credit is given by:
•  Interest = principal × rate × time

18-59
59
Financing (cont.)
•  Example 18.1
–  What will be the interest payment on a 4-
month loan for $35,000 that carries an annual
interest rate of 12%?
–  Interest = principal × rate × time

= $35,000 × .12 × 4/12
= $1,400

18-60
Financing (cont.)
•  The Annual Percentage Rate (APR) is

computed as follows:

18-61
Financing (cont.)
–  Example 18.2 Rio Corporation plans to borrow
$35,000 for a 120-day period and repay $35,000
principal amount plus $1,400 interest at maturity.
What is the APR?
•  APR = ($1400/$35000) × (1/120/365)

= 12.167%

18-62
18-63
Evaluating the Cost of Credit
•  Trade credit is given by firm’s suppliers.

The credit terms generally include discount
for early payment.
•  For example, credit terms of 3/10, net 30

means that a 3% discount is offered for
payment within 10 days or the full amount
is due in 30 days. What is the cost of not
taking the 3% discount?

18-64
Evaluating the Cost of Credit (cont.)
•  The 3% cash discount is the interest cost

of extending the payment period an
additional 20 days. For a $100 invoice, the
cost is computed as follows:
•  APR = ($3/$97) × (1/20/365)

= .5644 or 56.44%
18-65
Evaluating the Cost of Bank Loans
•  We can apply equation 18-8 (APR) to

estimate the cost of bank loans also.
•  However, firms generally borrow money

from bank by creating a line of credit.

18-66
Evaluating the Cost of Bank Loans
(cont.)
•  A line of credit entitles the firm to borrow

up to the stated amount. In exchange, the
firm is generally required to maintain a
minimum balance in the bank throughout
the loan period (known as compensating
balance).
•  The compensating balance increases the
annualized cost of loan to the borrower.

18-67
Checkpoint 18.3
Calculating the APR for a Line of Credit

M&M Beverage Company has a $300,000 line of credit that requires a
compensating balance equal to 10 percent of the loan amount. The
rate paid on the loan is 12 percent per annum, $200,000 is borrowed
for a six-month period, and the firm does not currently have a deposit
with the lending bank. The dollar cost of the loan includes the interest
expense as well as the opportunity cost of maintaining an idle cash
balance in the compensating balance (which is 10% of the loan). To
accommodate the cost of the compensating balance requirement,
assume that the added funds will have to be borrowed and simply left
idle in the firm’s checking account. What would the annualized rate on
this loan be if there was no compensating balance requirement? What
is the annual rate on this loan with the compensating balance
requirement?

18-68
Checkpoint 18.3

18-69
Checkpoint 18.3

18-70
Checkpoint 18.3

18-71
•  Assume that your firm has a $1,000,000 line of credit

that requires a compensating balance equal to 20
percent of the loan amount. The rate paid on the loan
is 12 percent per annum, $500,000 is borrowed for a
six-month period, and the firm does not currently have
a deposit with the lending bank. To accommodate the
cost of the compensating balances requirement,
assume that the added funds will have to be borrowed
and simply left idle in the firm’s checking account.
What would the annualized rate on this loan be with
the compensating balance requirement?

18-72
•  Since there is a compensating balance

requirement, the amount actually
borrowed (B) will be larger than the
$500,000 needed.
•  $500,000 will constitute 80% of the total
borrowed funds because of the 20 percent
compensating balance requirement.
•  Hence, .80B = $500,000

18-73
•  If .80B = $500,000
•  Amount borrowed (B) = $500,000/.80
= $625,000
•  Thus interest is paid on a $625,000 loan of

which only $500,000 is available for use by
the firm.

18-74
Strategy
•  We can solve for APR using Equation

(18-8),

18-75
Step 3: Solve
•  Here interest is paid on a loan of

$625,000.
•  Thus, interest for 6-months at 12%

= $625,000 × .12 × ½
= $37,500

18-76
•  APR = ($37,500 ÷ $500,000) × 2

= 0.15 or 15%

18-77
Step 4: Analyze
•  We observe that the presence of a

compensating balance requirement
increases the cost of credit from 12% to
15%.
•  This results from the fact that the firm
pays interest on $625,000 but it gets the
use of $37,500 less, or $500,000 -
$37,500 = $462,500.

18-78
18.5 Managing
the Firm’s
Investment in
Current Assets

Managing the Firm’s Investment in
Current Assets
•  The primary types of current assets that

most firms hold are:
–  Cash,
–  Marketable securities,
–  Accounts receivable, and
–  Inventories.

18-80
Cash and Marketable Securities
•  Cash and marketable securities are held to

pay the firm’s bills on a timely basis.
•  Holding too little cash and marketable
securities could lead to default.
•  However, holding excessive cash and
marketable securities is costly since they
earn little, or very low rates of return.

18-81
(cont.)
•  There are two fundamental problems of

cash management:
1.  Keeping enough cash on hand to meet the
firm’s cash disbursal requirements on a
timely basis.
2.  Managing the composition of the firm’s

marketable securities portfolio.

18-82
(cont.)
•  Problem #1: Maintaining a Sufficient

Balance
•  To maintain an adequate balance requires

an accurate forecast of firm’s cash
receipts and disbursements. This is
accomplished through a cash budget.

18-83
(cont.)
•  Once estimates of cash flows have been

made, firm may want to find ways to
reduces its need for cash.
•  For example, if the firm is able to

accelerate its cash collections or slow down
its cash disbursements, it will be able to
reduce its need for cash.

18-84
(cont.)
•  Problem #2: Managing the composition of
the firm’s marketable securities portfolio
•  Firms prefer to hold cash reserves in

money market securities as it can be
easily and quickly converted to cash at
little or no loss. These securities mature in
less than 1 year, have low or no default
probability, and are highly liquid.

18-85
18-86
Managing Accounts Receivable
•  Whenever a sale is made on credit, it

increases the firm’s account receivable
balance. Cash flow from sales cannot be
invested until accounts receivable are
collected.
•  Efficient collection policies and procedures

will improve firm profitability and liquidity.

18-87
Determinants of the Size of a Firm’s
Investment in Accounts Receivable
1.  The level of credit sales as a percentage

of sales. This percentage will vary with
the type of business.
2.  The level of sales. Higher the sales,
greater the accounts receivable.
3.  The credit and collection policy.

18-88
18-89
Terms of Sale
•  Terms of sale identify the possible

discounts for early payment, the discount
period, and the total credit period.
•  It is generally stated in the form a/b, net
c. For example 1/10, net 30, means the
customer can deduct 1% if paid within 10
days, otherwise the account must be paid
within 30 days.

18-90
Terms of Sale (cont.)
•  What is the opportunity cost of passing up

this 1% discount in order to delay
payment for 20 days?

18-91
Terms of Sale (cont.)
•  Annualized opportunity cost
= 0.01/(1-.01) × 365/(30-10)
= .1843 or 18.43%

18-92
Customer Quality
•  It is important to determine the type of

customer who should qualify for trade
credit. It is critical to understand the
customer’s short-run financial well being.
•  As the quality of customer declines, it

increases the costs of credit investigation,
default costs, and collection costs.

18-93
Customer Quality (cont.)
•  To determine customer quality, firm can

analyze the liquidity ratios, other
obligations, and overall profitability of the
firm.
•  The firm can also obtain information from
credit rating services such as Dun &
Bradstreet that provide information on the
financial status, operations, and payment
history for most firms.

18-94
Customer Quality (cont.)
•  Credit score is also a popular way to

evaluate the credit risk of individuals and
firms.
•  Credit score is a numerical evaluation of

each applicant based on the applicant’s
current debts and history of making
payments on a timely basis.

18-95
18-96
Collection Efforts
•  Control of accounts receivables focuses on

the control and elimination of past-due
receivables. This can be done by
analyzing various ratios such as average
collection period, the ratio of receivables to
assets, accounts receivable turnover ratio,
and the amount of bad debt relative to
sales over time.

18-97
Collection Efforts (cont.)
•  The manager can also perform “aging of

accounts receivable” to determine in
dollars and percentage the proportion of
receivables that are past due.

18-98
18-99
Managing Inventories
•  Inventory management involves the

control of assets that are produced to be
sold in the normal course of business. It
includes raw materials, work-in-process,
and finished goods inventory.
•  How much inventory a firm carries
depends upon the target level of sales, and
the importance of inventory.

18-100
Key Terms
•  Bank transaction loans

•  Cash conversion cycle
•  Commercial paper
•  Credit scoring
•  Factor
•  Float
•  Inventory conversion period

18-101
Key Terms (cont.)
•  Inventory management
•  Line of credit
•  Money market securities
•  Operating cycle
•  Permanent sources of financing
•  Permanent investments
•  Principle of self-liquidating debt

18-102
Key Terms (cont.)
•  Secured current liabilities

•  Spontaneous sources of financing
•  Temporary investments in assets
•  Temporary sources of financing
•  Terms of sale
•  Trade credit
•  Unsecured current liabilities

18-103

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Chapter 18

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

1. Describe the risk-return tradeoff involved

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

4. Evaluate the cost of financing as a key

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Working capital management encompasses

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• The current ratio (current assets divided

• Both measures of liquidity provide the

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Managing a firm’s liquidity requires

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Working capital decisions will change the

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Consider the effect on Ford’s liquidity of

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Liquidity refers to the firm’s ability to pay

• We can determine the firm’s liquidity by

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• We are given the following information:

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Current Assets and Current Liabilities

• Firm’s liquidity can be measured by

1. Current Ratio = Current Assets ÷ Current

2. Working capital = Current Assets – Current

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Current Ratio (2008)

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• The long-term financing arrangement for

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Managing the firm’s net working capital

• Since each financing source comes with

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• This principle states that the maturity of

• Thus a seasonal increase in inventories

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Temporary investments in assets

– For example, cash and marketable securities,

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Permanent investments are composed

– For example, the firm’s minimum level of

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Spontaneous sources of financing arise

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Temporary sources of financing

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Permanent sources of financing are

– For example, intermediate term loans, bonds,

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Figure 18-2 illustrates the use of principle

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

• Operating and cash conversion cycles

• The shorter these two cycles are, the more

1.  Describe the risk-return tradeoff involved

4.  Evaluate the cost of financing as a key

•  Working capital management encompasses

•  The current ratio (current assets divided

•  Both measures of liquidity provide the

•  Managing a firm’s liquidity requires

•  Working capital decisions will change the

•  Consider the effect on Ford’s liquidity of

•  Liquidity refers to the firm’s ability to pay

•  We can determine the firm’s liquidity by

•  We are given the following information:

•  Firm’s liquidity can be measured by

1. Current Ratio = Current Assets ÷ Current

2. Working capital = Current Assets – Current

•  Current Ratio (2008)

•  The long-term financing arrangement for

•  Managing the firm’s net working capital

•  Since each financing source comes with

•  This principle states that the maturity of

•  Thus a seasonal increase in inventories

•  Temporary investments in assets

–  For example, cash and marketable securities,

•  Permanent investments are composed

–  For example, the firm’s minimum level of

•  Spontaneous sources of financing arise

•  Temporary sources of financing

•  Permanent sources of financing are

–  For example, intermediate term loans, bonds,

•  Figure 18-2 illustrates the use of principle

•  Operating and cash conversion cycles

•  The shorter these two cycles are, the more

•  The operating cycle measures the time

•  When the firm is able to purchase items of

•  Cash conversion cycle is shorter than

•  Figure 18-3 calculations are based on the

•  To calculate the operating cycle, we need

•  The inventory conversion period measures

•  The second half of the operating cycle is

•  To calculate the cash conversion cycle, we

•  We have now calculated the following:

–  Inventory conversion period = 91 days

•  Cash conversion cycle = 176 days – 61

•  If GM were to have an average collection

•  The firm’s cash conversion cycle and

•  We are given the following for DELL:

–  Average collection period = 18.89 days

•  Cash conversion cycle

•  The cash conversion cycle is negative as Dell is

•  When evaluating alternative sources of

•  Interest = principal × rate × time

–  Interest = principal × rate × time

•  The Annual Percentage Rate (APR) is

•  APR = ($1400/$35000) × (1/120/365)

•  Trade credit is given by firm’s suppliers.

•  For example, credit terms of 3/10, net 30

•  The 3% cash discount is the interest cost

•  APR = ($3/$97) × (1/20/365)

•  We can apply equation 18-8 (APR) to

•  However, firms generally borrow money

•  A line of credit entitles the firm to borrow

•  Assume that your firm has a $1,000,000 line of credit

•  Since there is a compensating balance

•  Thus interest is paid on a $625,000 loan of