6-Working Capital Management Financing Arrangements

6-Working Capital Management Financing Arrangements -...

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Balance Sheet Current Assets _______________ Fixed Assets Current Liabilities _______________ Long-Term Funds BALANCE SHEET MANAGEMENT Making Investment Decisions Making Financing Decisions Certain assets and current liabilities are spontaneous to increases in sales volumes. Higher net working capital and fixed assets required to support more sales. Retained earnings are also used to support these needs. However, there may be a gap for which external debt or equity is needed to balance the funding needed to grow
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Sources of Short-Term Financin g There are various sources of short-term funds available to a firm: Trade Credit from Suppliers Bank Loans Corporate Promissory Notes Bankers’ Acceptances Foreign Borrowing Loans Against Receivables and Inventory
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How is the “?” discount rate determined Lenders look at their opportunity return and risk using the following analytical procedures: Character of managers and owners (governance) Capital (debt to equity ratio versus industry leaders and average) Capacity to repay loan (cash flows, ratios and related volatility) Collateral (available assets as security) Security Features (convertible * “-” or redeemable ** “+” ) Term to maturity Covenants (restrictions imposed) Rating agency assessments Conditions (Porter’s five forces and business risk assessment) Present Value = Price = ∑ [(coupon * 1,000)/(1+ ? ) t ] + 1,000/(1 + ? ) N +/- Features *The bond may be converted to equity by its owner if its “stock value” is greater than the bond par. There is a “+” to the normal non-convertible bond price since the embedded “long call option” may have value ( lowers the K d “-” ) ** The company may call (redeem) the bond for cash if rates decrease (the current bond price is greater than par). An
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6-Working Capital Management Financing Arrangements -...

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