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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 ?.
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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?
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.
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?
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.
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,
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.
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 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 currentliabilities to finance some of our fixedassets.
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 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.
Balance Sheet Temporary Current Assets
Balance Sheet Temporary Temporary Current Assets Short-term financing
Balance Sheet Temporary Temporary Current Assets Short-term financing Permanent Fixed Assets
Balance Sheet Temporary Temporary Current Assets Short-term financing Permanent Permanent Fixed Assets Financing and Spontaneous Financing
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