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L9-ch18 - Chapter 18 Working-Capital Management Shortterm...

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Click to edit Master subtitle style Chapter 18 Working-Capital Management & Short- term Financing 11
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Working-Capital Management Current Assets Cash, marketable securities, inventory, accounts receivable. Long-Term Assets Equipment, buildings, land. Which one earn higher rates of return ? 2
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Current Liabilities Short-term notes, accrued expenses, accounts payable. Long-Term Debt and Equity Bonds, preferred stock, common stock. Which one are less expensive for the firm? 3 Working-Capital Management
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4 4 Lower Higher Higher Lower Use More CL, Less LTD, TE Working-Capital Management Invest More CA, Less FA Profitability Liquidity
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Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock 5
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Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock 6
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Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock Suppose we use current liabilities to finance some 7
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The Hedging Principle Temporary Assets (those held < 1 year) Should be financed with temporary sources of financing. Permanent Assets (those held > 1 year) Should be financed with permanent and spontaneous sources of financing. 8
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Spontaneous Financing Accounts payable that arise spontaneously in day-to-day operations (trade credit, wages payable, accrued interest and taxes). Short-term (temporary) financing Unsecured bank loans, commercial paper, loans secured by A/R or inventory. Permanent Financing 9 The Hedging Principle
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10 Temporary Assets (some CA) Temporary Financing (some CL) Spontaneous Financing (some CL) Permanent Financing (LTD, PS, CS) Permanent Assets (some CA, all FA) Balance Sheet
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Cost of Short-Term Credit (p.653) Interest = principal x rate x time Ex: Borrow $10,000 at 8.5% for 9 months Interest = $10,000 x .085 x 0.75 year = 11 to solve for rate , and get the Annual Percentage Rate (APR) APR = [interest/principal] x [1/time] Ex: pay $637.50 interest on $10,000 principal for 9 months APR = 637.50/10,000 x 1/0.75 = 0.085 = 8.5%
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Annual Percentage Yield (APY) is similar to APR, except that it accounts for i m m i = the nominal rate of interest m = the # of compounding periods per year APY = ( 1 + ) - 1 12 Cost of Short-Term Credit
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