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Foundations of Financial Management Page 1

Chapter 6

Working Capital and the

Financing Decision

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Chapter 6 - Outline LT 6-1

What is Working Capital Management?

Term Structure of Interest Rates

U.S. Government Securities

Short-Term vs. Long-Term Financing

Working Capital Financing Plans

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I. Working Capital Management LT6-2

Working Capital Management is controlling

and managing the current assets of a firm

Most time-consuming job of a financial

manager

Crucial to long-term success or failure of a

business

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PPT 6-1FIGURE 6-1

The nature of

asset growth

I

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Foundations of Financial Management Page 2

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PPT 6-8

FIGURE 6-5

Matching long-term

and short-term needs

II

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PPT 6-9

FIGURE 6-6

Using long-term financing

for part of short-term needs

II

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PPT 6-9

FIGURE 6-7

Using short-term financing

for part of long-term needsII

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III. Term Structure of Interest RatesLT 6-3

The Term Structure of Interest Rates is also

known as the Treasury Yield CurveGraph showing the relationship between S/T and

L/T interest rates at different maturities

Normal shape is an upward sloping curve,

indicating that L/T interest rates are greater than

S/T interest rates

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Foundations of Financial Management Page 3

McGraw-Hill/Irwin 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

IV. Short-Term vs. Long-TermFinancing LT 6-5

Short-term financing is less expensive but

riskier

Long-term financing is more expensive but

less risky (or safer)Firm must decide the appropriate mix

Similar to the risk-return trade-off

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PPT 6-11TABLE 6-7Alternative

financing plans

IV

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PPT 6-11TABLE 6-8

Impact of financing

plans on earnings

IV

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PPT 6-12

TABLE 6-9

Expected returns under

different economic conditions

IV

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Foundations of Financial Management Page 4

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PPT 6-12

TABLE 6-10

Expected returns for

high-risk firm

IV

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VI. Working Capital Financing PlansLT 6-6

An aggressive (risky) firm:

S/T financing and low liquidity

A conservative (safe or cautious) firm:

L/T financing and high liquidity

A moderate (balanced) firm: S/T financing and high liquidity OR

L/T financing and low liquidity

An appropriate strategy is determined based on the

companys tolerance for risk

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PPT 6-13

TABLE 6-11

Asset liquidity and financing assets

VI