BF Notes 2 - February 13, 2008 Ch.6 I. Working capital...

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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 A. Seasonal and permanent increase in inventory requires financing. 1. Seasonal fluctuations a. Produce all at once b. III. Team Structure of Interest Rates A. Liquidity premium theory, long term securities are less liquid and more price sensitive B. Market segmentation
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a. Demand for securities varies b. Based on investor needs various financial instruments were created offering different c. Expectation theory, long term rates reflect the average of expected short term rates over the time period of the security outstanding. February 18, 2008 Ch. 7 I. Cash management A. Cash is a necessary but low earning asset B. Financial managers attempt to: 1. Minimize cash balances 2. Meet obligations C. Reasons for holding cash 1. Transactions 2. Compensating balances 3. Precautionary needs D. Temporarily exceeds cash balance are transferred to intersomething accounts. II. Collection and disbursements A. The financial manager attempts to 1. Speed up inflow 2. Slow outflow B. Playing float – float is the difference between the balance in the check book and the balance in the bank. C. Sweep Accounts 1. Maintain zero balance in the checking account 2. End of the day balance is swept into an interest bearing account. 3. Overdrafts are covered with transfers from the interest bearing account. D. Lock Boxes
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1. Customers remit payments locally. 2. Checks are cleared locally 3. Money is wire transferred to main account – reducing mailing time. III. Marketable Securities A. Short Term investments 1. Liquid 2. Safe – term is short enough to avoid interest rate cost. B. Types of marketable securities 1. Federal government T-Bills 2. Federal agency 3. Non-government a. Certificate of deposit b. Commercial paper c. Bankers acceptances d. Savings account e. Money market accounts IV. Accounts Receivable A. Accounts receivable is an investment A/R should generate a return greater than or equal to investments of a similar type B. Credit standards 1. Firm screens applicants on the basis of: a. Prior record payments b. Financial stability c. Current net worth 2. Five c’s of credit a. Character
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b. Capacity c. Capital d. Conditions e. Collateral 3. T of trade Sales discounts encourage consumers to pay early
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This note was uploaded on 04/29/2008 for the course FINA 10100 taught by Professor Markert during the Spring '08 term at Ithaca College.

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BF Notes 2 - February 13, 2008 Ch.6 I. Working capital...

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