BA 301 Exam 2 Review - BA 301 Exam 2 Review Chapter 4:...

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BA 301 Exam 2 Review Chapter 4: Strategic Financial Management - Financial Facts: o The Yield Curve looks inverted for the first time since the 1980’s; this is bad news for the economy. The Yield Curve indicates the base cost for long term capital in the economy (in relation with years), positive slope is normal. Every country trades off the curve o There is a gap between corporate investment and the cash flow from operations. 70% of the investment is financed internals and 30% externally. Do you finance with debt or equity? o Wall Street Journal shareholder score card--- # 1 is Chico’s Fas - Working Capital Management —Management of the short term assets and liabilities of the firm (CA and CL). Day to day activities. o Net Working Capital= Current Assets – Current Liabilities o Managers minimize the cost of maintaining the net working capital position of the company o Old Paradigm: Working Capital is good (liquidity); measured by high current ratio (2.0) Cost of maintaining inventory—excess inventory adds value to customers Purchasing & Accts Payable—The supplier is an adversary; key issue is to lower prices o New Paradigm: Working Capital is bad b/c of poor planning and use of funds. Measured is W/C and sales. Restructure business processes to reduce working capital Cost of maintaining inventory—Reduce inventory by changing processes and working with suppliers Purchasing & Accts Payable—Timeliness of delivery more important than price. Good purchasing includes terms, quality, and delivery. Example: Dell: Better planning w/ suppliers makes for more effective and profitable operations o The Costs of Holding Current Assets: Carrying Costs—Easy to measure; cost increases as we increase the level of assets. Includes capital costs, warehousing, insurance. Capital costs, warehousing, insurance, bad credit Shortage costs—Tough to measure; cost decreases as we increase the level of current assets Stock outs (out of inventory), sales (tight credit limit) On the curve, find intersection of CC (pos) and SC (neg), and drag up to TC curve to find the minimum TC of holding the assets
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Flexible policy—high levels of inv & liberal credit terms to customers, results in high level of AR. Cost more but generate higher future cash flows The Hedged Approach: Reflects seasonal variation (ST) and permanent current assets (LT) AKA capital o The Cash Conversion Cycle (CCC): The length of time between the payment of cash for inventory (to supplier) and the receipt of cash from accounts (collect from customer). AKA # of days capital invested CCC= DSO + DSI - DPO (or avg payables period) You want CCC to go down (very short or neg), and you want to decrease DSO (expedite collections), decrease DSI (increase inventory turnover), and increase DPO (lengthen payables period) Negative CCC is good b/c it means its avg payment period is longer than is operating cycle
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This note was uploaded on 04/02/2008 for the course B A 301 taught by Professor Gray,garyjosephwoolridge,joseph during the Fall '07 term at Pennsylvania State University, University Park.

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BA 301 Exam 2 Review - BA 301 Exam 2 Review Chapter 4:...

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