ch16 - 16-1 CHAPTER 16 Financing Current Assets Working...

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Unformatted text preview: 16-1 CHAPTER 16 Financing Current Assets Working capital financing policies A/P (trade credit) Commercial paper S-T bank loans 16-2 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. 16-3 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. 16-4 Conservative financing policy $ Years Perm C.A. Fixed Assets Marketable securities Zero S-T Debt L-T Fin: Stock, Bonds, Spon. C.L. 16-5 Short-term credit Any debt scheduled for repayment within one year. Major sources of short-term credit Accounts payable (trade credit) Bank loans Commercial loans Accruals From the firm’s perspective, S-T credit is more risky than L-T debt. Always a required payment around the corner. May have trouble rolling over loans. 16-6 Advantages and disadvantages of using short-term financing Advantages Speed Flexibility Lower cost than long-term debt Disadvantages Fluctuating interest expense Firm may be at risk of default as a result of temporary economic conditions 16-7 Accrued liabilities Continually recurring short-term liabilities, such as accrued wages or taxes....
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This note was uploaded on 12/04/2010 for the course BA 201 taught by Professor Jones during the Spring '10 term at Mansfield University of Pennsylvania.

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ch16 - 16-1 CHAPTER 16 Financing Current Assets Working...

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