A Cash Conversion Cycle Approach to Liquidity Analysis

Author(s): Verlyn D. Richards and Eugene J. Laughlin

Source: Financial Management, Vol. 9, No. 1, (Spring, 1980), pp. 32-38
Published by: Blackwell Publishing on behalf of the Financial Management Association
International
Stable URL: http://www.jstor.org/stable/3665310
Accessed: 17/04/2008 02:23

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at
http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at
http://www.jstor.org/action/showPublisher?publisherCode=black.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.

JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We enable the
scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that
promotes the discovery and use of these resources. For more information about JSTOR, please contact support@jstor.org.

http://www.jstor.org
A Cash Conversion
to Liquidity Analysis
Verlyn D. Richards and Eugene J. Laughlin
The authors both teach at the College of Business Administration at
Kansas State University, where Verlyn Richards is Professor of
Finance and Eugene Laughlin is Professor of Accounting.
Introduction
Althoughworkingcapitalmanagementreceivesless
attentionin the literaturethanlonger-terminvestment
and financingdecisions,it occupiesthe majorportion
of a financialmanager'stime andattention[9, p. 173].
In part,this simplyreflectsthe repetitivenatureof in-
vestmentcommitmentswith relativelyshort life ex-
pectancyand rapid transformationfrom one invest-
mentformto another[6, pp. 1-2]. Thetime devotedto
workingcapital management,however,also reflects
the crucial liquidity - or repayment capability - im-
plications of a firm's short-term investment and
financingpolicies.Inattentionto the liquiditymanage-
ment processmay cause severedifficultiesand losses
due to adverseshort-rundevelopmentseven for the
firm with favorable long-run prospects. Incorrect
evaluationof the liquidity implicationsof a firm's
workingcapitalneeds may, in turn, subjectcreditors
and investorsto an unanticipatedrisk of default.
Financial managers and their external financial
analyst counterpartsrecognize, at least intuitively,
that all workingcapitalinvestmentsdo not enjoythe
same life expectancy,nor are they transformedinto
Cycle Approach
usableliquidityflowsat the samespeed.It is not clear,
however,that they recognizeexplicitlythe crucialrole
of these differencesin evaluatinga firm's liquidity
position.A cashconversioncycleapproachto working
capitalmanagementillustratesthe potentialdangerof
an intuitiveapproachto liquidityanalysis.
The Static View
Financial analysts traditionallyhave viewed the
currentratio as a key indicatorof a firm's liquidity
position.Logueand Merville,in an empiricalstudyof
the capital asset pricingmodel, state this traditional
view when they observethat:
As our liquidityvariable,the currentratio (CR) -
currentassets dividedby currentliabilities- was
chosen. Even a cursoryreview of most investment
texts suggeststhis variable'simportance:it is widely
understoodby investors;has more intuitiveappeal
thanothermeasures,suchas short-termassetsdivided
by total assets;andwas foundin the studyby Beaver,
Kettlerand Scholes [2] to be highlycorrelatedwith
Beta [5, p. 40].
32
RICHARDSAND LAUGHLIN/LIQUIDITY
ANALYSIS
Generalizationssuch as these must be viewedwith
caution.They fail to recognizethat the basicliquidity
protectionagainstunanticipateddiscrepanciesin the
amountandtimingof operatingcash inflowsand out-
flows is providedby a firm'scash reserveinvestments
in combinationwith its unused borrowingcapacity
rather than by total currentasset coverage of out-
standingcurrentliabilities.
Inter-firmand inter-periodcomparisonsof current
ratio statisticsare of questionablevalue to the finan-
cial analyst becauseof qualitativedifferencesin the
liquidity attributesof currentasset investments.A
concentrationof current assets in the less liquid
receivablesand inventoryforms may create an in-
creasingcurrentratioreflectinga deterioratingability
by the firm to cover its currentliabilitiesratherthan
an improvedliquiditypositionfor the firm. Analysts
responded to this problem by supplementingthe
currentratiowiththe morerestrictiveacid-testratio,a
ratio of the "degreeto which a company'scurrent
liabilities are covered by the most liquid current
assets" [1, p. 7]. By eliminatingthe relativelyilliquid
inventoriesand prepaidoperatingexpenses,the acid-
test ratio relates a firm's current liabilities to its
remainingcurrentasset commitmentsto cash, near-
cash, and receivables."Thus, the quick or acid-test
ratio is a much more severetest of currentliquidity
than is the workingcapital ratio" [8, p. 645].
The so-calledquickassetsin this ratioarepresumed
to be convertibleinto cash at approximatelytheir
stated balance sheet amounts.Firms may, however,
experiencedistinctdifferencesin the speedwithwhich
they can convertreceivables,as well as inventories,to
usablecash flows. Thus, the acid-testratio reflectsa
different,althoughnot necessarilymore reliable,test
of potentialsolvencythan the currentratio does. The
usefulnessof both static liquidityindicatorsis limited
by theirfailureto provideadequateinformationabout
cash flow attributesof the transformationprocess
withina firm's workingcapital position.
Static liquidityindicatorsemphasizeessentiallya
liquidation,ratherthan a going-concern,approachto
liquidity analysis. The ability to meet a firm's
obligationsthroughasset liquidationin the event of
default should be viewed as strictlya second line of
defense. Investors should focus their concern on
avoidingdefaultsituationsby emphasizing1) a firm's
abilityto coverits obligationswithcash flowsfroman
employmentof inventoryand receivableinvestments
withinthe normalcourseof the firm'soperations,and
2) the sensitivity of these operatingcash flows to
33
declining sales and earnings during periods of
economic adversity.Operatingcash flow coverage,
ratherthan asset liquidationvalue, is the crucialele-
ment in liquidityanalysis.
The Operating Cycle Concept
The flow conceptof liquiditycan be developedby
extendingthestaticbalancesheetanalysisof potentialliq-
uidationvalue coverageto includeincome statement
measuresof a firm'soperatingactivity.In particular, in-
corporatingaccountsreceivableand inventoryturnover
measuresintoan operating cycleconceptprovidesa more
appropriateview of liquiditymanagementthan does
relianceon the currentand acid-testratioindicatorsof
solvency.These additionalliquiditymeasuresexplicitly
recognizethat the life expectanciesof some working
capitalcomponentsdepend"uponthe extentto which
threebasicactivities- production,distribution (sales),
and collection - are noninstantaneousand un-
synchronized" [6, p. 3].
Accountsreceivableturnoveris an indicatorof the
withwhicha firm'saveragereceivables invest-
frequency
mentis converted intocash.Changesin creditandcollec-
tion policyhavea directimpacton the averageoutstan-
dingaccountsreceivable balancemaintained relativeto a
firm'sannualsales. Grantingmore liberalterms to a
firm'scustomerscreatesa larger,andpotentiallyless li-
quid,currentinvestmentin receivables.Unlesssalesin-
crease at least proportionatelyto the increase in
receivables,thispotentialdeteriorationin liquiditywillbe
reflectedin a lowerreceivables turnoveranda moreex-
tendedreceivables collectionperiod.Decisionsthatcom-
mit a firmto maintaining largeraveragereceivablesin-
vestmentsovera longertimeperiodwillinevitablyresult
in highercurrentand acid-testratios.
Inventoryturnoversdepictthe frequencywith which
firms converttheir cumulativestock of raw material,
work-in-process, and finishedgoods into productsales.
Adoptingpurchasing,productionscheduling,and dis-
tributionstrategiesthatrequiremoreextensiveinventory
commitmentsper dollarof anticipatedsalesproducesa
lowerturnoverratio.This,in turn,reflectsa longerand
potentiallyless liquidinventoryholdingperiod.If firms
cannotmodifyeitherthe paymentpracticesestablished
with tradecreditorsor theiraccessto short-termdebt
financingprovidedby non-tradecreditors,decisionsthat
createlongerandlessliquidholdingperiodswillagainbe
accompaniedby a higher currentratio indicatorof
solvency.
The cumulativedays per turnoverfor accounts
34
receivableand inventoryinvestmentsapproximates the
lengthof a firm'soperatingcycle. Incorporating these
asset turnoversinto an operatingcycle conceptof the
currentassetconversionperiodtherebyprovidesa more
realistic,althoughincomplete,indicatorof a firm'sli-
quidityposition.The operatingcycleconceptis deficient
as a cashflowmeasurein thatit failsto considerthe li-
quidityrequirements imposedon a firm by the time
dimension of its current liability commitments.
Integrating thetimepatternof cashoutflowrequirements
imposedby a firm'scurrentliabilitiesis as importantfor
liquidityanalysis as evaluatingthe associatedtime
patternof cashinflowsgeneratedby the transformation
of its ci rrentassetinvestments.
The Cash Conversion Cycle
The cash conversioncycle,by reflectingthe net time
intervalbetweenactualcash expenditureson a firm's
purchaseof productiveresourcesand the ultimate
recovery of cash receipts from product sales, es-
tablishes the period of time requiredto convert a
dollarof cashdisbursements backinto a dollarof cash
inflow from a firm's regular course of operations.
Evaluating the interrelated cash inflow-outflow
patternunderlyinga more completeapproachto li-
quidityanalysisrequiresan additionalflow indicator
for currentliabilities,however.This flow conceptcan
be derived from a payables turnoverratio relating
operatingcosts requiringcurrentcash expendituresto
the accountspayableand accruedpayableliabilities
createdby the short-termdeferralof these operating
expenditures.The relevant payables turnoverratio
will be definedas a firm's annualcash operatingex-
penditures(total operatingcosts minusdepreciation,
depletion,amortization,and relatedchargesthat do
not require current cash outlays) divided by the
currenttrade accountsand notes payableplus other
spontaneous liabilities directly associated with
deferredpaymentof these currentoperatingcosts.
As in the case of the inventoryandreceivablesturn-
over concepts,the liquidityimplicationsof a firm's
payablesturnoverexperiencecan be establishedmore
clearly by a time interval statement reflecting the
firm's average payment period. Specifically, the
averagepaymentperiod- 360daysdividedby the an-
nual payablesturnover- reflects the averagetime
over which a firm defers paymenton the costs in-
curredto supportits operatingactivities.Whiledeclin-
ing inventoryand receivableturnoverratios reflecta
largercurrentasset investmentthat must be financed
over a longer operatingcycle interval, a declining
FINANCIALMANAGEMENT/SPRING1980
payablesturnoverratio indicatesa largeraccumula-
tion over a longer period of spontaneousworking
capital financing providedby trade creditors. The
more extended operating cycle associated with a
declininginventoryand receivablesturnoverincreases
a firm's potential liquidity managementproblem.
Conversely,the longer payment period associated
with a decliningpayablesturnovertendsto moderate
the liquiditymanagementproblemfor a firm.
Introductionof a payablesturnoverconceptpoints
out that liquidityanalysisrequiresexplicitrecognition
of the extent to which four basic activities -
purchasing/production, sales,collection,andpayment
- create flows within the workingcapital accounts
that are noninstantaneousand unsynchronized.The
cash conversioncycle conceptportraysthese flowsby
integratingrespectivetime intervalsderived from a
firm's typical receivables,inventory, and payables
turnoverexperience.The concepttherebydepictsthe
residualtime intervaloverwhichadditional,nonspon-
taneousfinancingmust be negotiatedto compensate
for the noninstantaneousand unsynchronizednature
of a firm'sworkingcapital investmentflows.
Exhibit1 illustratesthe relationshipbetweena cash
conversioncycle indicator of the firm's additional,
nonspontaneous working capital financing re-
quirementsand the more traditionaloperatingcycle
concept of its asset conversionperiod. The diagram
points out that a residualcash flow financingperiod
depicted by the cash conversioncycle will be in-
fluencedby eitherexpansionor contractionin any of
the three liquidityflow measures:the inventorycon-
version period, receivables conversion period, or
payablesdeferralperiod.An increasein the lengthof
the operatingcyclewithouta concomitantlengthening
of the payablesdeferralperiodcreates additionalli-
quiditymanagementproblemsassociatedwiththeneed
to acquireadditionalnonspontaneous financingovera
longer, and potentiallyless certain, cash conversion
period.
Financial Management Implications
of the Cash Conversion Cycle
Workingcapitalprovidedby vendorsin the normal
courseof a firm'soperationsis spontaneousfinancing
in the sense that it will automaticallyincreaseand
decreaseover time. The availabilityof suchfinancing
is tied directlyto the typicaltradecredittermsoffered
by vendorsto theircustomersandthe volumeof goods
and services acquired under these terms. A dis-
tinguishingfeatureof this spontaneousfinancingis the
RICHARDSAND LAUGHLIN/LIQUIDITY
ANALYSIS
Exhibit 1. Cash ConversionCycle
Product
Sales
Inventory Receivables
Conversion Period Conversion Period
I
~~o-~ ~ Operating Cycle
x
0:r :
c __ Payables _LCash
CD
Deferral Period h Conversion Cycle
Cash
Outlay
absence of explicit financing charges as long as
purchaserspay withinthe stipulatedcreditperiodor
within the discount period when a cash discount is
offered for early payment.In additionto the spon-
taneity and nonexplicitcost attributes,trade credit
also providesflexibilityto workingcapital manage-
ment because"experienceshowsthat it is possibleto
achievecontinuityin the supplyof tradecreditevenin
adversity when the credit relationship is well
managed"[9, p. 231].
Some instances are found where "manufacturers
quite literallysuppliedall the financingfor new firms
by selling on credit terms substantiallylonger than
those of the new company" [9, p. 230]. The more
typicalfirm will find, however,that relianceon trade
creditcan be economicallyjustifiedfor financingonly
a portion of its working capital investments.The
remainingworking capital investmentrequirements
must be supportedby negotiatingexplicit nonspon-
taneous financing arrangementswith the firm's
creditorsand owners. It is the need for, and the li-
quidity managementproblemscreated by, this ad-
ditional working capital financingrequirementthat
providesthe basicrationalefor adaptingthe operating
cycle concept to a cash conversioncycle concept of
liquidityanalysis.
Cashmanagementconstraintsimposedby the more
uncertaincash flowstypicallyassociatedwitha longer
cash conversioncycle force firms to modifyboth the
investmentand financing aspects of their working
capitalmanagementpolicies.From a financialstruc-
ture standpoint, operating cash flow constraints
restricta firm'sabilityto supportadditionalworking
capital financing requirementsby supplementing
spontaneoustrade credit with nontrade sources of
short-termcredit. Short-termcreditorsare less in-
clined to finance additional working capital in-
vestmentson whichthere is a greaterrisk of default
and a greaterpotentialloss in liquidationvaluein the
event of default. Therefore,firms will have to rely
more extensivelyon longer-termfinancingarrange-
mentsto supportdesiredextensionsof theirnon-cash
35
currentassetcommitmentsto less liquidinventoryand
receivableinvestments.
From the investmentside, firmswill be requiredto
maintainadditionalliquidityreservesin compensating
and precautionarybalancesin order to compete for
the additionalnonspontaneousfinancingdesired to
supporta longerand less certaincash conversioncy-
cle. These additionalcommitmentsto precautionary
balance investments will be required to protect
providersof long-term,as well as short-term,financ-
ing againstunpredictable variationsin a firm'spattern
of futureoperatingcash flows.
In general,the movementtowarda longercashcon-
versioncycle will producea largerrequiredcommit-
ment to cash, as well as non-cash,currentasset in-
vestments and a less extensive relative ability to
finance these investments with current liabilities.
Therefore,workingcapitalmanagementpoliciesthat
createa longercash conversioncycle can be expected
to producea highercurrentand acid-testratio posi-
tion for the firm. In contrastto the conventionalview
that highercurrentand acid-testratiosreflecta more
liquid working capital investment position, this
analysis suggeststhat these higherratio values may
simplybe the by-productof a moreextensivecommit-
mentto less liquidformsof currentassetinvestments.
Negotiating nonspontaneousfinancingto support
both inventory and receivables investments held
beyondthe payablesdeferralperiodwould not be a
significantmanagementproblemif firmscouldpredict
with a high degree9f certaintythe futurepatternof
their operatingcash flows. In an uncertaineconomic
environment,however, the general availability of
additionalcredit financing,and a firm's additional
short-termborrowingcapabilityin particular,may be
inverselyrelatedto the length of its cash conversion
cycle. This inverserelationshipexists becauselonger
cash conversioncycles reducethe flexibilityavailable
to firms in managingtheir cash flows in the face of
economic adversity.The greaterpotentialfor being
locked into excessive inventory and uncollectible
receivablesinvestmentsreducesa firm'sabilityto rely
on funds derived from operatingcash flows for a
timely repaymentof maturingobligations.
This approachbecomes increasinglyapplicableas
firms experience greater volatility in their sales
revenueand,therefore,greateruncertaintyin predict-
ing the amount and timing of their cash receiptsin
responseto changingeconomic conditions.The im-
portance of this increased unpredictability is
magnified, or mitigated, by three additional, in-
terrelatedfactors:the relativeamountsof variableand
36
fixed cash operatingexpense, the extent of built-in
rigidities in the current asset turnovers, and the
availabilityof borrowingcapacityto supportdiscon-
tinuities in the firm's cash flow pattern. Larger
amountsof fixed cash expenses,lower currentasset
turnovers, and reduced availability of borrowing
capacitysignificantlyincreaseliquiditymanagement
problems created by an underlying volatility in
revenue.The effect of these three factors is incor-
poratedin the cash conversioncycle approachto li-
quiditymanagement.
A Cash Conversion Cycle Illustration
Cashconversioncycle analysiscan be implemented
for most firms with conventionalincome statement
and balancesheet data. For publiclyheld firms, this
informationis generally available in their annual
reportsto stockholdersand their SEC 10-K reports.
Exhibit2 depictsthe datarequiredfor cashconversion
cycle analysisas reportedin the financialstatements
for MartinMariettaCorporation.Exhibit3 illustrates
the firm's liquidityindicatorscomputedfrom these
data. This firm was selected because it reflects the
logic of cashconversioncycle analysisreasonablywell
in an actual ratherthan a theoreticalcontext.
The primarypoint, as illustratedby the Martin
Mariettaexperience,is that staticliquidityanalysisin
the form of current and acid-test ratios may not
providemeaningfulindicatorsof the liquidityposition
with respectto the moreappropriatecash flow stand-
point.The declinein the cash conversioncycle and in
the associatedneedfor nonspontaneous financingover
the 1975-1978periodis indicativeof a moderatingli-
quiditymanagementproblem.This contrastswith an
impliedincreasein the liquiditymanagementproblem
from the decliningcurrentratio viewpointor an in-
determinatechange in the firm's liquidity position
relativeto the mixedbehaviorpatternin the acid-test
ratio. The currentratio, as traditionallyinterpreted,
wouldappearto give the wrongindicatorof changein
liquiditypositionwhilethe acid-testratio simplyfails
to indicateclearlya pronouncedchangein the firm's
operatingcash flows.
The cash conversioncycle should be evaluatedin
relationto a firm'smaintenanceof liquidityreservein-
vestments, its availability of unused borrowing
capacity, and potentialvolatility in the firm's cash
flows. Exhibit3 points out that a supplementarytest
of liquidity reserve position can be constructedby
comparingthe firm's cash assets - working cash
balancesplus temporarycash investments- to its
total currentassets. The data for Martin Marietta
FINANCIALMANAGEMENT/SPRING1980
showthat a morerapidrecoveryof operatingcashex-
penditureshas been accompaniedby an increasing
proportionof currentassets held in the most liquid
form.In the previoussection,we notedthat additional
liquidityreserveswill be requiredto supporta longer
andless certaincash conversioncycle. By contrast,an
increasingliquidityreserveinvestmentcoincidentwith
a shorter and more certain cash conversioncycle
would contributeto an improvingliquidityposition.
This observedrelationshipfor MartinMariettaagain
suggests an improvingliquidity position despite a
decliningcurrentratio and an indeterminanttrendin
the acid-testratio.
Illustratingthe interrelationshipamong the cash
conversioncycle, the availabilityof unusedborrowing
capacity, and the associated problem of cash flow
volatilityis beyondthe scopeof this paper.Procedures
for stipulatinga firm'sborrowingcapacityin relation
to uncertaintyaboutits futurecash flows are not yet
well-developedin the literature.Recently,articlesby
Kim [3], Scott [7], and Krausand Litzenberger[4]
appearto provideuseful insightsinto the problemof
evaluating corporate debt capacity. Continued
researchalongthe linestheyhavesuggestedmay allow
a moreexplicitextensionof the cash conversioncycle
conceptto considerthe liquiditymanagementeffects
of debt capacityconstraints.
Summary
An examination of conventional,static balance
sheet liquidityratios indicatesthe inherentpotential
for misinterpreting a firm'srelativeliquidityposition.
The extensionof this traditionalanalysisto include
flowsembodiedin the operatingcycleconceptthrough
receivableand inventoryturnovermeasuresdirects
attentiononly to the timing of a firm's cash inflows
and excludesfrom considerationthe time elementof
its cash outflowrequirements. Sincecash outflowsare
not synchronizedwith inflows for the typical firm,
such an omission is a seriousdeficiencyin liquidity
analysis. Adopting a payablesturnoverconcept ex-
tendsthe operatingcycle analysisto incorporateboth
the relevant outflow and inflow components. The
resultingcashconversioncycle analysisprovidesmore
explicitinsightsfor managinga firm'sworkingcapital
position in a manner that will assure the proper
amountandtimingof fundsavailableto meeta firm's
liquidityneeds.
References
1. Annual Statement Studies, Philadelphia, Robert Morris
Associates, 1977.
RICHARDSAND LAUGHLIN/LIQUIDITY
ANALYSIS 37

Exhibit 2. Selected Financial Data for Martin Marietta Corporation

(000,000 omitted)*
YearEndedDecember31 1978 1977 1976 1975

Net sales $1,758 $1,440 $1,213 $1,053

Cost of goods sold $1,269 $1,030 $ 876 $ 774
Selling, general and
administrativeexpense 192 161 142 132
Depreciation, depletion,
and amortization 72 66 63 60
Total operating expense $1,533 $1,257 $1,081 $ 966
Net operating income $ 225 $ 183 $ 132 $ 87

Cash and short-term

investments $ 204 $ 158 $ 107 $ 46
Notes and accounts
receivable 283 227 178 147
Inventories 199 209 199 186
Prepayments and other
current assets 16 11 11 14
Total current assets $ 702 $ 605 $ 495 $ 393

Accounts payable $ 133 $ 106 $ 86 $ 78

Salaries, benefits, and
payroll tax 72 48 37 33
Income taxes 210 151 88 36
Currentmaturities of
long-term debt 14 16 16 14
Total current
liabilities $ 429 $ 321 $ 227 $ 161

*Source:Years 1977and 1978,MartinMariettaCorporationAnnualReportto Stock-

holders, 1978. Years 1975 and 1976, Martin MariettaCorporation10-K
reportsto the SEC.
Exhibit 3. Liquidity Ratios and Cash Conversion Cycle
for Martin Marietta Corporation
1978 1977 1976 1975

StaticRatios:
CurrentRatio 1.64 1.88 2.18 2.44
Acid-TestRatio 1.14 1.20 1.26 1.20
TurnoverRatios:
ReceivablesTurnover 6.21 6.34 6.81 7.16
InventoryTurnover 6.38 4.93 4.40 4.16
PayablesTurnover* 7.13 7.73 8.28 8.16
CashConversionCycle:
ReceivablesConversionPeriod 58 days 57 days 53 days 50 days
InventoryConversionPeriod 56 days 73 days 82 days 87 days
OperatingCycle 114days 130days 135days 137days
Less: Payment Deferral Period 50 days 47 days 43 days 44 days
Cash Conversion Cycle 64 days 83 days 92 days 93 days
Supplementary Static Ratio:
Cash Assets/Current Assets 0.29 0.26 0.22 0.12

*Cost of goods sold plus sellingand generaland administrative

expensedividedby accountspayableplus
salaries,benefits,and payrolltax.
38 FINANCIALMANAGEMENT/SPRING1980

2. W. Beaver,P. Kettler,andM. Scholes,"TheAssociation ment (Summer1972),pp. 37-44.

Between Market Determinedand Accounting Deter-
mined Risk Measures," The Accounting Review (Oc-
tober 1970),pp. 654-682.
3. E. Han Kim, "A Mean-VarianceTheory of Optimal
CapitalStructureand CorporateDebt Capacity,"Jour-
nal of Finance (March 1978), pp. 45-63.
4. A. Kraus and R. Litzenberger,"A State-Preference
Model of Optimal Financial Leverage,"Journal of
Finance(September1973),pp. 911-922.
5. Dennis E. Logue and Larry J. Merville, "Financial
Policy and Market Expectations,"FinancialManage-
6. Dileep R. Mehta, Working Capital Management,
EnglewoodCliffs, N.J., Prentice-Hall,Inc., 1974.
7. James H. Scott, Jr., "A Theory of Optimal Capital
Structure," The Bell Journal of Economics (Spring
1976),pp. 33-54.
8. G. A. Welsch and R. N. Anthony, Fundamentalsof
Financial Accounting, revised ed., Homewood, Ill.,
RichardD. Irwin, 1977.
9. J. Fred Weston and EugeneF. Brigham,Essentialsof
ManagerialFinance,5th ed., Hinsdale,Ill., The Dryden
Press, 1979.

FINANCIAL MANAGEMENT ASSOCIATION

TENTH ANNUAL MEETING

The Financial Management Association brings together practicing financial managers from
industry, financial institutions, and nonprofit and governmental organizations, and members of the
academic community with interests in financial and investment decision-making. The tenth annual
program, October 23-25, 1980, at the Marriott Hotel in New Orleans, Louisiana, will stress the in-
terrelationships between theory and practice in financial and investment management.

1980 Annual Meetings

Dates: October 23-25, 1980
Place: Marriott Hotel
New Orleans, Louisiana

Program Participation: Professor Frank K. Reilly

College of Commerce and Business Administration
University of Illinois
Urbana, Illinois 61801
Tel: (217) 333-6391

Meeting Arrangements: Professor Donald Woodland

Louisiana State University
College of Business Administration
Baton Rouge, Louisiana 70803
Placement Information: Professor John Boquist
Graduate School of Business
Indiana University
Bloomington, Indiana 47401
Tel: (812) 337-8568