IFM10 Ch21 Lecture(1)

IFM10 Ch21 Lecture(1) - CHAPTER21 WorkingCapitalManagement...

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1 CHAPTER 21 Working Capital Management
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2 Topics in Chapter Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and commercial paper
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3 Basic Definitions Gross working capital:   Total current assets. Net working capital: Current assets - Current liabilities. Net operating working capital (NOWC): Operating CA – Operating CL = (Cash + Inv. + A/R) – (Accruals + A/P) (More…)
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4 Definitions  (Continued) Working capital management:  Includes both establishing working  capital policy and then the day-to-day  control of cash, inventories, receivables,  accruals, and accounts payable. Working capital policy: The level of each current asset. How current assets are financed.
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5 Selected Ratios for SKI SKI Industry Current 1.75 2.25 Quick 0.83 1.20 Debt/Assets 58.76% 50.00% Turnover of Cash 16.67 22.22 DSO(365-day year) 45.63 32.00 Inv. Turnover 4.82 7.00 F.A. Turnover 11.35 12.00 T.A. Turnover 2.08 3.00 Profit Margin 2.07% 3.50% ROE 10.45% 21.00% Payables deferral 30.00 33.00
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6 How does SKI’s working capital  policy compare with the industry? Working capital policy is reflected in a  firm’s current ratio, quick ratio, turnover  of cash and securities, inventory  turnover, and DSO. These ratios indicate SKI has large  amounts of working capital relative to its  level of sales.  Thus, SKI is following a  relaxed policy.
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7 Is SKI inefficient or just  conservative? A relaxed policy may be appropriate if it  reduces risk more than profitability. However, SKI is much less profitable  than the average firm in the industry.   This suggests that the company  probably has excessive working capital.
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8 Cash Conversion Cycle The cash conversion cycle focuses on the time  between payments made for materials and  labor and payments received from sales:     Cash  Conversion =    Cycle  Inventory Conversion +     Period  Receivables  Collection   −    Period Payables  Deferral   Period
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9 Cash Conversion Cycle  (Cont.) CCC =                       +                   – CCC =           + 45.6 – 30 CCC = 75.7 + 45.6 – 30 CCC = 91.3 days. Days per year Inv. turnover Payables deferral period Days sales outstanding 365 4.82
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10 Cash Management: Cash doesn’t earn  interest, so why hold it? Transactions: Must have some cash to pay  current bills. Precaution: “Safety stock.”  But lessened by 
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This note was uploaded on 09/15/2011 for the course FINA 4080 taught by Professor Mary during the Spring '11 term at Toledo.

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IFM10 Ch21 Lecture(1) - CHAPTER21 WorkingCapitalManagement...

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