1 / 20

Chapter 14

Chapter 14. Working Capital Management. Working-Capital Management. Current Assets cash, marketable securities, inventory, accounts receivable Long-Term Assets equipment, buildings, land Which earn higher rates of return ? Which help avoid risk of illiquidity ?.

albert
Download Presentation

Chapter 14

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 14

  2. Working Capital Management

  3. Working-Capital Management • Current Assets • cash, marketable securities, inventory, accounts receivable • Long-Term Assets • equipment, buildings, land • Which earn higher rates of return? • Which help avoid risk of illiquidity?

  4. Working-Capital Management • CurrentAssets • cash, marketable securities, inventory, accounts receivable • Long-TermAssets • equipment, buildings, land • Risk-Return Trade-off: Current assets earn low returns, but help reduce the risk of illiquidity.

  5. Working-Capital Management • Current Liabilities • short-term notes, accrued expenses, accounts payable • Long-Term Debt and Equity • bonds, preferred stock, common stock • Which are more expensive for the firm? • Which help avoid risk of illiquidity?

  6. Working-Capital Management • CurrentLiabilities • short-term notes, accrued expenses, accounts payable • Long-Term Debt and Equity • bonds, preferred stock, common stock • Risk-Return Trade-off: Current liabilities are less expensive, but increase the risk of illiquidity.

  7. Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock To illustrate, let’s finance all current assets with current liabilities,

  8. Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock To illustrate, let’s finance all current assets with current liabilities, and finance all fixed assets with long-term financing.

  9. 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.

  10. 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.

  11. 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!

  12. 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.

  13. Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock Suppose we use currentliabilities to finance some of our fixedassets.

  14. 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!

  15. The Hedging Principle • PermanentAssets (those held > 1 year) • should be financed with permanent and spontaneous sources of financing. • TemporaryAssets (those held < 1 year) • should be financed with temporary sources of financing.

  16. Balance Sheet Temporary Current Assets

  17. Balance Sheet Temporary Temporary Current Assets Short-term financing

  18. Balance Sheet Temporary Temporary Current Assets Short-term financing Permanent Fixed Assets

  19. Balance Sheet Temporary Temporary Current Assets Short-term financing Permanent Permanent Fixed Assets Financing and Spontaneous Financing

  20. The Hedging Principle • Permanent Financing • intermediate-term loans, long-term debt, preferred stock, common stock • Spontaneous Financing • accounts payable that arise spontaneously in day-to-day operations (trade credit, wages payable, accrued interest and taxes) • Short-term financing • unsecured bank loans, commercial paper, loans secured by A/R or inventory

More Related