IFM10 Ch21 Lecture(1)

IFM10 Ch21 Lecture(1) - CHAPTER 21 Working Capital...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 21 Working Capital Management 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
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 2
Background image of page 2
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) 3 (More…)
Background image of page 3

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

View Full DocumentRight Arrow Icon
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. 4
Background image of page 4
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 5
Background image of page 5

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

View Full DocumentRight Arrow Icon
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. 6
Background image of page 6
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. 7
Background image of page 7

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

View Full DocumentRight Arrow Icon
Cash Conversion Cycle 8 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
Background image of page 8
Cash Conversion Cycle (Cont.) 9 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
Background image of page 9

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

View Full DocumentRight Arrow Icon
interest, so why hold it? Transactions: Must have some cash to pay current bills. Precaution: “Safety stock.” But lessened by credit line and marketable securities. Compensating balances: For loans and/or services provided. Speculation: To take advantage of bargains, to
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/13/2012 for the course FINA 4080 taught by Professor Mary during the Spring '11 term at Toledo.

Page1 / 45

IFM10 Ch21 Lecture(1) - CHAPTER 21 Working Capital...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online