VALUATION
Generally TVM is not as critical to
short term financing as long term
financing
Exception: Decision will result in
permanent reduction of:
Receivables
Inventory
Two Approaches to Short
Term Decision Making
Financial Statement Approach
Valuatio

Problem 9-4
Assumptions
Average # of remittances per month =
Average face value =
Mail float =
Processing float =
Availability float =
Opportunity rate =
Fixed cost =
Variable cost =
Part a Total cost for cash collection system
TC = Total cost
N = # of re

7-5
a.)
Avg. Daily Purchases = SUM of Purchases/(#of Months*30days)
Days Payables Outstanding = Ending Payables/Avg. Daily Purchases
ASSUMPTIONS
December January February
March
April
May
Purchases
400
375
350
325
400
500
Payables
342
320
297
345
430
June

4-2.
Lott Manufacturing, Inc.
Assumptions
Order costs(F)
Holding costs per unit (H)
Total period quantity (T)
Order Quantity (Q)
Planning Period
Delivery Time (days)
a.)
EOQ =
EOQ =
b.)
Total cost = (F*T/Q) + (H*Q/2)
Total Cost @10,000 units =
$50.00
$3.0

Problem 3-3
a.)
The present value of a future sum.
How much (in PV) is needed to invest at 10% per year in order to have $3,000 nine months
from now? Using the simple interest formula, we get:
FVn = 3000
k = 10%
n = 273.75
273.75 days = 9 months in the Pr

5-5
Certainty NPV and Uncertainty NPV for Credit Decision.
Solution assumes all collection costs are incurred at the time of the credit sale collection.
a.)
Credit terms, CP:
Opportunity cost of funds, k:
Dollar amount of invoice, S:
Variable costs, VCR:

4.
Anvaricorp - estimate of lost value from delayed collection of remittances.
Average daily remittances (lira)
Exchange rate (lira per Can. $)
Weighted-average cost of capit
Mail days lira check
Mail days Canadian $ draft
Processing days, lira check
Proc

Problem 3-2
a.)
Computing PV of $10,000 in six months at 12% per year.
Use the exact, daily compound interest formula to discount the future value:
FVn = $10,000.00
N = 182.5
k = 12%
(182.5 days = 6 months in the Problems header)
PV = FV / (1 + (k / 365)n

1
Sales
I. COLLECTIONS
Discount
Net
Late
Total
II.PAYMENTS
Materials:
Labor:
G&A salaries
Lease
Misc expense
Tax
Interest
Capital expenditures
Total payments
Increase or (decrease)
III. SURPLUS or LOAN
Beginning cash w/o loan
Cumulative cash
Less: Target

16-5
Prime =
8.00%
Increment over prim
1.50%
Commitment fee =
0.25% on the unused portion of the credit line
Compensating balan
10.00% on the amount borrowed
Size of credit line =
$65,000,000
Amount borrowed = $40,000,000
Days of borrowing =
365
No balanc

Problem 3-5
BMX Bike Co. - adopting new credit terms.
Given:
increase in NPV per day from new credit
$0.75
opportunity cost
10.00%
a.)
PV of a perpetual stream of cash flow at an 10% discount rate.
$0.75 / (.10/365) =
b.)
PV of a perpetual stream of cash

MONEY MARKET
What is It?
Use of money market for companies
Appearance on the balance sheet
Characteristics of money market
instruments
Safe
Liquid
Examples of money market instruments
YIELD ON FIXED INCOME
INSTRUMENTS
After tax yield = pre tax yield (

CASH HOLDINGS
STRATEGIES
This chapter explores how much cash a
firm should hold
Three Liquidity strategies
Low liquidity-minimal investment in cash
Advantage enables the firm to internally
finance increases in NWC and PPE. Also
higher ROA
Disadvantage

INTRODUCTION
Working capital or Gross working
capital= current assets
Net working capital = current
assets - current liabilities
Importance = efficient
management of WC results in a
reduced need to borrow
CASH FLOW TIMELINE
Page 5
Appears regularly thr

IMPACT of WORKING
CAPITAL MANAGEMENT ON
: Solvency.assets exceed total
liabilities
Liquiditycompany can pay its
bills
SOLVENCY MEASURES
Current ratio
Quick ratio
Net working capitaltells us the
amount of current assets financed by
permanent capital (Bo

INVENTORY MANAGEMENT
Purpose is NOT to teach new
inventory management techniques
Purpose is to examine the impact
that inventory management has on
the cash cycle
SYMBOLS
T = total inventory units
demanded
Q = order quantity
F = fixed order cost per ord

CONCEPT OF TRADE
CREDIT
Goes back to the Romans
Dont accept it willingly
There are companies that do not
accept it willingly
AR AS A COMPONENT OF
WC
Significant percent of working capital
Financial manager can greatly enhance
shareholder value by minim

MEASURES OF
COLLECTION PATTERN
DSO = AR / daily credit sales
AR Turnover = 365 / DSO
Aging schedules
COLLECTION PROCEDURES
When to make the first contact
When to make the first follow-up
When to call and when to write
Whom to contact
NON-PAYING CUSTO

SPONTANEOUS SOURCES
OF FINANCE
Accounts payable
Accruals
TYPES OF PURCHASE
TERMS
Open account
Cash discount
Seasonal dating
Consignment
Discounts for allowing electronic
debiting of an account
PAYABLES AND THE CASH
FLOW TIMELINE
Accounts payable repr

DOLLAR DAY FLOAT
Converts float in days to dollars
Days of float x dollar amount = dollar
day float
Top of page 239
Average dollar day float
Average collection float
Annual cost of float
Problem 9-1 on page 248
COST EQUATION FOR
LOCKBOX PROCESSING
Fixed c

SHORT TERM FINANCING
TERMINOLOGY
Financing strategy
Permanent current assets
Temporary current assets
Aggressive financing strategy
Conservative financing strategy
Moderate financing strategy
SHORT TERM FINANCING
ALTERNATIVES
(Separate slides follow)

Problem 3-5
Texas International Chili Co. - adopting new credit terms.
Given:
increase in NPV per day from new credit
$0.75
opportunity cost
10.00%
a.)
PV of a perpetual stream of cash flow at an 10% discount rate.
$0.75 / (.10/365) =
b.)
PV of a perpetua