Upload
yunia-riswati
View
12
Download
1
Tags:
Embed Size (px)
DESCRIPTION
TM 2
Citation preview
Ch. 18:
Management
and Short-Term Financing 2002, Prentice Hall, Inc.
Working-Capital ManagementCurrent Assetscash, marketable securities, inventory, accounts receivableLong-Term Assetsequipment, buildings, land
Which earn higher rates of return?Which help avoid risk of illiquidity?
Working-Capital ManagementCurrent Assetscash, marketable securities, inventory, accounts receivableLong-Term Assetsequipment, buildings, land
Risk-Return Trade-off: Current assets earn low returns, but help reduce the risk of illiquidity.
Working-Capital ManagementCurrent Liabilitiesshort-term notes, accrued expenses, accounts payableLong-Term Debt and Equitybonds, preferred stock, common stock
Which are more expensive for the firm?Which help avoid risk of illiquidity?
Working-Capital ManagementCurrent Liabilitiesshort-term notes, accrued expenses, accounts payableLong-Term Debt and Equitybonds, preferred stock, common stock
Risk-Return Trade-off: Current liabilities are less expensive, but increase the risk of illiquidity.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
To illustrate, lets finance all current assets with current liabilities,
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
To illustrate, lets finance all current assets with current liabilities,
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
To illustrate, lets finance all current assets with current liabilities, and finance all fixed assets with long-term financing.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
To illustrate, lets finance all current assets with current liabilities, and finance all fixed assets with long-term financing.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Suppose we use long-term financing to finance some of our current assets.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Suppose we use long-term financing to finance some of our current assets.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Suppose we use long-term financing to finance some of our current assets. This strategy would be less risky, but more expensive!
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Suppose we use current liabilities to finance some of our fixed assets.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Suppose we use current liabilities to finance some of our fixed assets.
Balance Sheet
Current Assets Current Liabilities
Fixed Assets Long-Term Debt Preferred Stock Common Stock
Suppose we use current liabilities to finance some of our fixed assets. This strategy would be less expensive, but more risky!
The Hedging PrinciplePermanent Assets (those held > 1 year)should be financed with permanent and spontaneous sources of financing.Temporary Assets (those held < 1 year)should be financed with temporary sources of financing.
Balance Sheet
TemporaryCurrent Assets
Balance Sheet
Temporary TemporaryCurrent Assets Short-term financing
Balance Sheet
Temporary TemporaryCurrent Assets Short-term financing
PermanentFixed Assets
Balance Sheet
Temporary TemporaryCurrent Assets Short-term financing
Permanent Permanent Fixed Assets Financingand Spontaneous Financing
The Hedging PrinciplePermanent Financingintermediate-term loans, long-term debt, preferred stock, common stockSpontaneous Financingaccounts payable that arise spontaneously in day-to-day operations (trade credit, wages payable, accrued interest and taxes)Short-term financingunsecured bank loans, commercial paper, loans secured by A/R or inventory
Cost of Short-Term CreditInterest = principal x rate x time
ex: borrow $10,000 at 8.5% for 9 months
Interest = $10,000 x .085 x 3/4 year = $637.50
Cost of Short-Term CreditWe can use this simple relationship:Interest = principal x rate x timeto solve for rate, and get the
Cost of Short-Term CreditWe can use this simple relationship:Interest = principal x rate x timeto solve for rate, and get theAnnual Percentage Rate (APR)
Cost of Short-Term CreditWe can use this simple relationship:Interest = principal x rate x timeto solve for rate, and get theAnnual Percentage Rate (APR)
interest 1 principal time
Cost of Short-Term Credit
Cost of Short-Term Credit interest 1 principal time
Cost of Short-Term Credit interest 1 principal time
example: If you pay $637.50 in interest on $10,000 principal for 9 months:
Cost of Short-Term Credit interest 1 principal time
example: If you pay $637.50 in interest on $10,000 principal for 9 months:
APR = 637.50/10,000 x 1/.75 = .085 = 8.5% APR
Cost of Short-Term CreditAnnual Percentage Yield (APY) is similar to APR, except that it accounts for compound interest:
Cost of Short-Term CreditAnnual Percentage Yield (APY) is similar to APR, except that it accounts for compound interest:
i m m
Cost of Short-Term CreditAnnual Percentage Yield (APY) is similar to APR, except that it accounts for compound interest:
i m m
i = the nominal rate of interestm = the # of compounding periods per year
Cost of Short-Term CreditWhat is the (APY) of a 9% loan with monthly payments?
APY = ( 1 + ( .09 / 12 ) 12 -1 ) = .0938
= 9.38%
Sources of Short-term CreditUnsecured
Sources of Short-term CreditUnsecuredaccrued wages and taxes
Sources of Short-term CreditUnsecuredaccrued wages and taxestrade credit
Sources of Short-term CreditUnsecuredaccrued wages and taxestrade creditbank credit
Sources of Short-term CreditUnsecuredaccrued wages and taxestrade creditbank creditcommercial paper
Sources of Short-term CreditUnsecuredaccrued wages and taxestrade creditbank creditcommercial paperSecured
Sources of Short-term CreditUnsecuredaccrued wages and taxestrade creditbank creditcommercial paperSecuredaccounts receivable loans
Sources of Short-term CreditUnsecuredaccrued wages and taxestrade creditbank creditcommercial paperSecuredaccounts receivable loansinventory loans