Chap8_2009 - Chapter 8 Overview of Working Capital...

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Chapter 8 Overview of Working Capital Management
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Learning Objectives After studying Chapter 8, you should be able to: Explain how the definition of "working capital" differs between financial analysts and accountants. Understand the two fundamental decision issues in working capital management -- and the trade-offs involved in making these decisions. Discuss how to determine the optimal level of current assets. Describe the relationship between profitability, liquidity, and risk in the management of working capital. Explain how to classify working capital according to its “components” and according to “time” (i.e., either permanent or temporary). Describe the hedging (maturity matching) approach to financing and the advantages/disadvantages of short- versus long-term financing. Explain how the financial manager combines the current asset decision with the liability structure decision.
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Topics • Working Capital Concepts • Working Capital Issues • Financing Current Assets: Short-Term and Long-Term Mix • Combining Liability Structure and Current Asset Decisions
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Working Capital Concepts Net Working Capital Current Assets - Current Liabilities. Gross Working Capital The firm’s investment in current assets. Working Capital Management The administration of the firm’s current assets and the financing needed to support current assets.
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Significance of Working Capital Management In a typical manufacturing firm, current assets exceed one-half of total assets. Excessive levels can result in a substandard Return on Investment (ROI). Current liabilities are the principal source of external financing for small firms. Requires continuous, day-to-day managerial supervision. Working capital management affects the company’s risk, return, and share price.
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Capital Issues Assumptions • 50,000 maximum units of production • Continuous production • Three different policies for current asset levels are
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Chap8_2009 - Chapter 8 Overview of Working Capital...

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