{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

In-Class Exercises 3

In-Class Exercises 3 - flow from operations How Much...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Problem #1 d. Problem #1 e. Problem #1 f. In-Class Exercises 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Financial Flexibility 2 Financial Flexibility is related to a firm’s overall financial structure and if financial policies allow it enough flexibility to take advantage of unforeseen opportunities. A flexible short-term financial policy would maintain a high level of current assets to sales, such as: Maintaining large cash balances. Maintaining large inventory levels. Offering liberal credit terms, leading to higher receivable levels.
Image of page 2
Lambda 3 Lambda measures the likelihood that a firm will exhaust its liquid resources. Initial Liquid Total Anticipated Net Cash Flow Reserve + During Planning Horizon Lambda = -------------------------------------------------------------- Uncertainty About the Net Cash Flow During Planning Horizon Lambda includes information about the volatility of expected cash flows. Historical data is used to calculate the denominator, using the standard deviation of the distribution of the firm’s expected net cash flow from operations.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: flow from operations. How Much Liquidity Is Enough? 4 LAMBDA In Left Tail LAMBDA In Left Tail 1.645 5.00% 2.053 2.00% 1.670 4.75% 2.108 1.75% 1.695 4.50% 2.170 1.50% 1.722 4.25% 2.241 1.25% 1.751 4.00% 2.326 1.00% 1.780 3.75% 2.432 0.75% 1.812 3.50% 2.576 0.50% 1.845 3.25% 2.808 0.25% 1.881 3.00% 2.879 0.20% 1.919 2.75% 2.969 0.15% 1.960 2.50% 3.291 0.10% 2.004 2.25% 3.291 0.05% Probability Probability For example, a Lambda of 1.645 signals a 5% chance of running out of cash. How Much Liquidity Is Enough? 5 • Using Lambda, and based on a firm’s unique circumstances, a firm need only maintain liquid reserves to meet unforeseen circumstances arising from a high degree of uncertainly regarding future cash flows. – If the future is stable, there is a lesser need Current Liquidity Index & Lambda 6 • These two measures have a coverage component similar to the Current Ratio, but they also have a time (or flow) dimension as a result of including a measure of cash flow....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern