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Business Finance Ch. 6

Business Finance Ch. 6 - Financing Working Capital A...

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February 13, 2008 Ch.6 I. Working capital management A. Financing and controlling the current assets of a firm. B. Operating Cycle Use cash to purchase inventory, sell inventory and create acct. receivable. Collect receivable and then turns back into cash. C. Nature of growth 1. Current assets a. Are expected to become cash in one operating cycle b. Level may be permanent or increasing 2. Goal to matching sales and production a. Accts. Receivable and inventory inc. as production inc. b. Self liquidating 1. Inventory is sold 2. Receivables are collected 3. Payables are paid 1. 400,000 + 12 % (2,000,000) = 400,000 + 240,000 = 640,000 2. 100,000 + 40,000 = 140,000 II. Financing Working Capital
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Unformatted text preview: Financing Working Capital A. Seasonal and permanent increase in inventory requires financing. 1. Seasonal fluctuations a. Produce all at once b. Level production (include inventory) & a constant workforce III. Team Structure of Interest Rates A. Liquidity premium theory, long term securities are less liquid and more price sensitive B. Market segmentation a. Demand for securities varies b. Based on investor needs various financial instruments were created offering different rates & maturities. c. Expectation theory, long term rates reflect the average of expected short term rates over the time period of the security outstanding....
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