IM_Chapter14 - Chapter 14 Working Capital Management...

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After reading this chapter, students should be able to: Define basic working capital terminology. Calculate the inventory conversion period, the receivables collection period, and the payables deferral period to determine the cash conversion cycle. Briefly explain how a negative cash conversion cycle works. Distinguish among relaxed, restricted, and moderate current asset investment policies, and explain the effect of each on risk and expected return. Explain how EVA methodology provides a useful way of thinking about working capital. List the reasons for holding cash. Construct a cash budget, and explain its purpose. Explain why firms are likely to hold marketable securities. State the goal of inventory management and identify the three categories of inventory costs. Monitor a firm’s receivables position by calculating its DSO and reviewing aging schedules. List the four elements of a firm’s credit policy. Identify and distinguish among the three different current asset financing policies. Briefly explain the advantages and disadvantages of short-term financing. List the four major types of short-term funds. Learning Objectives: 14 - 1 Chapter 14 Working Capital Management LEARNING OBJECTIVES
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Distinguish between free and costly trade credit, calculate both the nominal and effective annual percentage costs of not taking discounts, given specific credit terms, and explain what stretching accounts payable is and how it reduces the cost of trade credit. Describe the importance of short-term bank loans as a source of short- term financing and discuss some of the key features of bank loans. Explain why large, financially strong corporations issue commercial paper, and why this source of short-term credit is typically less reliable than bank loans if the firm gets into financial difficulties. Define what a “secured” loan is and what type of collateral can be used to secure a loan. Learning Objectives: 14 - 2
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We have never found working capital an interesting topic to students, hence it is, to us, a somewhat more difficult subject to teach than most. Perhaps that’s because it comes near the end of the course, when everyone is tired. More likely, though, the problem is that working capital management is really more a matter of operating efficiently than thinking conceptually correctly-- i.e., it is more practice than theory--and theory lends itself better to classroom teaching than practice. Still, working capital management is important, and it is something that students are likely to be involved with after they graduate. Since we have only one chapter on working capital, we try to go all the way through it. However, the chapter is modular, so it is easy to omit sections if time pressures require. Assuming you are going to cover the entire chapter, the details of what
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IM_Chapter14 - Chapter 14 Working Capital Management...

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