Chapter 19 Fundamentals of  Corporate Finance Fourth Edition Working Capital Management and Short-Term Planning Slides by ...
Topics Covered <ul><li>Working Capital </li></ul><ul><li>Links Between Long-Term and Short-Term Financing </li></ul><ul><l...
Working Capital <ul><li>Net Working Capital  - Current assets minus current liabilities.  Often called working capital. </...
Working Capital <ul><li>Simple Cycle of operations </li></ul>Cash Finished goods inventory Receivables Raw materials inven...
Working Capital
Working Capital <ul><li>Example  -  Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income s...
Working Capital <ul><li>Example  -  Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income s...
Working Capital <ul><li>Example  -  Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income s...
Working Capital <ul><li>Example  -  Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income s...
Working Capital <ul><li>Example  -  Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income s...
Changes in Cash & W.C. <ul><li>Example  - Dynamic Mattress Company </li></ul>
Changes in Cash & W.C. <ul><li>Example  - Dynamic Mattress Company </li></ul>Assume  dividend = $1 mil R.E.=$11 mil
Changes in Cash & W.C. <ul><li>Example  - </li></ul><ul><li>Dynamic  </li></ul><ul><li>Mattress  </li></ul><ul><li>Company...
Changes in Cash & W.C. <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic used cash as follows </li></u...
Cash Budgeting <ul><li>Steps to preparing a cash budget </li></ul><ul><li>Step 1 - Forecast the sources of cash. </li></ul...
Cash Budgeting <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic forecasted sources of cash </li></ul>...
Cash Budgeting <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic collections on AR </li></ul>
Cash Budgeting <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic forecasted uses of cash </li></ul><ul...
Cash Budgeting <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic  </li></ul><ul><li>cash budget </li><...
Cash Budgeting <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic short term financing requirements </l...
A Short Term Financing Plan <ul><li>Example  - Dynamic Mattress Company </li></ul><ul><li>Dynamic forecasted deferrable ex...
A Short Term Financing Plan <ul><li>Example  -  </li></ul><ul><li>Dynamic  </li></ul><ul><li>Mattress  </li></ul><ul><li>C...
Sources of Short Term Financing <ul><li>Bank loans </li></ul><ul><li>Commercial paper </li></ul><ul><li>Secured loans </li...
Cost of Bank Loans <ul><li>Simple Interest </li></ul>Effective annual rate
Cost of Bank Loans <ul><li>Discount Interest </li></ul>
Web Resources http://pages.stern.nyu/~adamador www.gecapital.com www.treasuryandrisk.com www.americanbanker.com www.intltr...
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    1. 1. Chapter 19 Fundamentals of Corporate Finance Fourth Edition Working Capital Management and Short-Term Planning Slides by Matthew Will McGraw Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved
    2. 2. Topics Covered <ul><li>Working Capital </li></ul><ul><li>Links Between Long-Term and Short-Term Financing </li></ul><ul><li>Tracing Changes in Cash and Working Capital </li></ul><ul><li>Cash Budgeting </li></ul><ul><li>A Short-Term Financing Plan </li></ul><ul><li>Sources of Short-Term Financing </li></ul><ul><li>The Cost of Bank Loans </li></ul>
    3. 3. Working Capital <ul><li>Net Working Capital - Current assets minus current liabilities. Often called working capital. </li></ul><ul><li>Cash Conversion Cycle - Period between firm’s payment for materials and collection on its sales. </li></ul><ul><li>Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital. </li></ul><ul><li>Shortage Costs - Costs incurred from shortages in current assets. </li></ul>
    4. 4. Working Capital <ul><li>Simple Cycle of operations </li></ul>Cash Finished goods inventory Receivables Raw materials inventory
    5. 5. Working Capital
    6. 6. Working Capital <ul><li>Example - Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle. </li></ul>
    7. 7. Working Capital <ul><li>Example - Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle. </li></ul>
    8. 8. Working Capital <ul><li>Example - Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle. </li></ul>
    9. 9. Working Capital <ul><li>Example - Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle. </li></ul>
    10. 10. Working Capital <ul><li>Example - Cash Conversion Cycle </li></ul><ul><li>Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle. </li></ul>
    11. 11. Changes in Cash & W.C. <ul><li>Example - Dynamic Mattress Company </li></ul>
    12. 12. Changes in Cash & W.C. <ul><li>Example - Dynamic Mattress Company </li></ul>Assume dividend = $1 mil R.E.=$11 mil
    13. 13. Changes in Cash & W.C. <ul><li>Example - </li></ul><ul><li>Dynamic </li></ul><ul><li>Mattress </li></ul><ul><li>Company </li></ul>
    14. 14. Changes in Cash & W.C. <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic used cash as follows </li></ul><ul><li>Paid $1 mil dividend. </li></ul><ul><li>Repaid $5 mil short term bank loan </li></ul><ul><li>Invested $14 mil </li></ul><ul><li>Purchased $5 mil of marketable securities </li></ul><ul><li>Accounts receivable expanded by $5 mil </li></ul>
    15. 15. Cash Budgeting <ul><li>Steps to preparing a cash budget </li></ul><ul><li>Step 1 - Forecast the sources of cash. </li></ul><ul><li>Step 2 - Forecast uses of cash. </li></ul><ul><li>Step 3 - Calculate whether the firm is facing a cash shortage or surplus. </li></ul>
    16. 16. Cash Budgeting <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic forecasted sources of cash </li></ul><ul><li>AR ending balance = AR beginning balance + sales - collections </li></ul>
    17. 17. Cash Budgeting <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic collections on AR </li></ul>
    18. 18. Cash Budgeting <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic forecasted uses of cash </li></ul><ul><li>Payment of accounts payable </li></ul><ul><li>Labor, administration, and other expenses </li></ul><ul><li>Capital expenditures </li></ul><ul><li>Taxes, interest, and dividend payments </li></ul>
    19. 19. Cash Budgeting <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic </li></ul><ul><li>cash budget </li></ul>
    20. 20. Cash Budgeting <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic short term financing requirements </li></ul>
    21. 21. A Short Term Financing Plan <ul><li>Example - Dynamic Mattress Company </li></ul><ul><li>Dynamic forecasted deferrable expenses </li></ul>
    22. 22. A Short Term Financing Plan <ul><li>Example - </li></ul><ul><li>Dynamic </li></ul><ul><li>Mattress </li></ul><ul><li>Company- </li></ul><ul><li>Financing Plan </li></ul>
    23. 23. Sources of Short Term Financing <ul><li>Bank loans </li></ul><ul><li>Commercial paper </li></ul><ul><li>Secured loans </li></ul>
    24. 24. Cost of Bank Loans <ul><li>Simple Interest </li></ul>Effective annual rate
    25. 25. Cost of Bank Loans <ul><li>Discount Interest </li></ul>
    26. 26. Web Resources http://pages.stern.nyu/~adamador www.gecapital.com www.treasuryandrisk.com www.americanbanker.com www.intltreasurer.com Click to access web sites Internet connection required Web Links
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