Ch 16 Progress - Define working capital management. Working...

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Define working capital management. Working capital management is the management of current assets and current liabilities. The term is used because the current accounts continually flow through the firm and are said to be working. How can a company speed up cash flow? Why should it? Cash flow may be speeded up through the following: Lockboxes—with lockboxes, funds are sent to a local post office box and cleared through a local bank. The funds are available more quickly than if they were sent directly to the company. Electronic funds transfer—computer and communications lines are used to transfer funds immediately, speeding up cash flow. Describe the various types of marketable securities. Treasury bills are short-term debt obligations of the federal government. They are issued weekly, may have a maturity of up to one year, and are perhaps the safest investment. Commercial certificates of deposit are issued by commercial banks and brokerage companies, are available in minimum amounts of $100,000, and may be traded prior to maturity. Commercial paper is a written promise from one company to another to pay a specific amount of money. Some companies invest extra cash in international markets such as the Eurodollar market, a market for trading U.S. dollars in foreign countries. What does it mean to have a line of credit at a bank? A line of credit is an agreement between a bank and a business in which the bank agrees to loan a specified amount to the business whenever it needs the money, as long as the bank has funds to lend. What are fixed assets? Why is assessing risk important in capital budgeting? Fixed, or long-term, assets are those assets expected to last for many years. Examples include production facilities (plants), offices and equipment. Assessing risk is important in capital budgeting because it allows for more informed project investment decision making. That is, decision makers can use estimated returns on investments and likelihood that the returns will be realized when deciding between competing capital expenditures. For example, a high return project may have such high risk that realizing a return is unlikely, making the investment undesirable. Without risk assessment, the project’s high return makes the project appear desirable.
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How can a company finance fixed assets? Two common choices of financing fixed assets exist for organizations wishing to make capital expenditures. The organization can attract new owners (equity financing), and/or it can take on long-term liabilities (debt financing). Debt financing includes long-term bank loans and corporate bond issues. What is a bond and what do companies do with them? A bond is debt security that a company sells to raise long-term funds. The bond is a certificate, much like an IOU, that represents the company’s debt to the bondholder. Organizations issue bonds to finance long-term capital investment projects.
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Ch 16 Progress - Define working capital management. Working...

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