chapter 18 - COPYRIGHT©ZHULI 1 Chapter 18 Short-term...

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Unformatted text preview: COPYRIGHT©ZHULI 1 Chapter 18 Short-term financial planning COPYRIGHT©ZHULI 2 Objectives 1. Understand why the firm needs to invest in net working capital. 2. Show how long-term financing policy affects short- term financing requirements. 3. Trace a firm’s sources and uses of cash and evaluate its need for short-term borrowing. 4. Develop a short-term financing plan that meets the firm’s need for cash. COPYRIGHT©ZHULI 3 Content Links between long-term and short-term financing Working capital Tracing changes in cash and working capital Cash budgeting A short-term financing plan Sources of short-term financing The cost of bank loans COPYRIGHT©ZHULI 4 The firm’s total capital requirement grows over time. It also exhibits seasonal variation around the trend. COPYRIGHT©ZHULI 5 The total capital requirement can be met through either long- or short-term financing. When long-term financing does not cover the total capital requirement, the firm must raise short-term capital to make up the difference. When long-term financing more than covers the total capital requirement, the firm has surplus cash available for short-term investment. COPYRIGHT©ZHULI 6 Relaxed strategy, where the firm is always a short-term lender. It implies a permanent short-term cash surplus. This surplus will be invested in marketable securities. COPYRIGHT©ZHULI 7 Middle-of-the-road policy, The firm has spare cash that it can lend out during the part of the year when total capital requirements are relatively low, but it is a borrower during the rest of the year when capital requirements are relatively high. COPYRIGHT©ZHULI 8 Restrictive policy, where the firm is always a short-term borrower. COPYRIGHT©ZHULI 9 What is the best level of long-term financing relative to the total capital requirement? 1. Matching maturities 1. Permanent working capital requirements 1. The comforts of surplus cash COPYRIGHT©ZHULI 10 Content Links between long-term and short-term financing Working capital Tracing changes in cash and working capital Cash budgeting A short-term financing plan Sources of short-term financing The cost of bank loans COPYRIGHT©ZHULI 11 The components of working capital Short-term, or current, assets and liabilities are collectively known as working capital. COPYRIGHT©ZHULI 12 Current assets...
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This note was uploaded on 05/11/2010 for the course BUSINESS S 409 taught by Professor Terryryan during the Summer '10 term at Winthrop.

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chapter 18 - COPYRIGHT©ZHULI 1 Chapter 18 Short-term...

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