Chapter 15.ppt

Chapter 15.ppt - CHAPTER 15 Working Capital Management...

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    15-1 CHAPTER 15 Working Capital Management Alternative working capital policies Cash management Inventory and A/R management Trade credit Bank loans
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    15-2 *Working capital terminology Gross working capital = total current assets. Net working capital = current assets – current  liabilities. Net operating working capital = current assets  minus non-interest bearing current liabilities. Working capital policy – deciding the level of each  type of current asset to hold, and how to finance  current assets. Working capital management – controlling cash,  inventories, and A/R, plus short-term liability  management.
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    15-3 *Selected ratios for SKI Inc. SKI Ind Avg Current ratio (CA/CL) 1.75x 2.25x Debt/Assets 58.76% 50.00% 16.67x 22.22x Days sales outstanding  [Recievables/(sales/365)] 45.63 32.00 Inventory turnover- Sales/inv 4.82x 7.00x Fixed assets turnover 11.35x 12.00x Total assets turnover 2.08x 3.00x Profit margin - NI/sales 2.07% 3.50% Return on equity 10.45% 21.00%
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    15-4 *How does SKI’s working capital  policy compare with its industry? Working capital policy is reflected in the  current ratio, turnover of cash and  securities, inventory turnover, and days  sales outstanding. These ratios indicate SKI has large  amounts of working capital relative to its  level of sales.   SKI is either very conservative or  inefficient.
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    15-5 *Is SKI inefficient or  conservative? A conservative (relaxed) policy may be  appropriate if it leads to greater  profitability. However, SKI is not as profitable as the  average firm in the industry.   This suggests the company has excessive  working capital.
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    15-6 *Working capital financing  policies Moderate – Match the maturity of the  assets with the maturity of the financing. Aggressive – Use short-term financing  to finance permanent assets. Conservative – Use permanent capital  for permanent assets and temporary  assets.
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    15-7 Moderate financing policy Years Lower dashed line would be more aggressive. $ Perm C.A. Fixed Assets Temp. C.A. S-T Loans L-T Fin: Stock, Bonds, Spon. C.L.
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    15-8 Conservative financing policy $ Years Perm C.A. Fixed Assets Marketable  securities Zero S-T Debt L-T Fin: Stock, Bonds, Spon. C.L.
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  15-9 *Cash conversion cycle The cash conversion cycle focuses on the  length of time between when a company  makes payments to its creditors and when a  company receives payments from its  customers. CCC =
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Chapter 15.ppt - CHAPTER 15 Working Capital Management...

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