Current Assets and Current Liabilities

3. Current Assets and Current Liabilities • Current assets are short-term resources • Cash • Investments • Accounts receivable • Inventory • Current liabilities are short-term debts • Accounts payable • Accrued salaries • Accrued taxes • Short-term bank loans

4. Managing Current Assets • Managing cash • Investing idle cash • Maximizing accounts receivable • Optimizing inventory

5. Managing Cash • Effectively managing the firm’s cash flow is crucial • Transaction balances • Lockbox systems • Electronic funds transfer

6. Investing Idle Cash • Marketable securities • US Treasury bills (T-bills) • Commercial certificates of deposit (CDs) • Commercial paper • International investments – the Eurodollar

7. Short-term InvestmentPossibilities for Idle Cash

8. Maximizing Accounts Receivable • Each credit sale represents an account receivable--money owed to a business by credit customers • Typically due within 30, 60, or 90 days • 1-2% discount if paid between 10 and 30 days • 1-1.5% penalty charged if paid late

9. Optimizing Inventory • The objective is to maximize inventory investment without production cutbacks because of materials shortfalls or lost sales due to insufficient finished goods inventories.

10. Maximizing Current Liabilities • Accounts payable • Bank loans • Non-bank liabilities

11. Accounts Payable • Money an organization owes to suppliers for goods and services • Trade credits • Most suppliers offer trade discounts

12. Bank Loans • Line of Credit • An arrangement by which a bank agrees to lend a specified amount of money to an organization upon request • Secured Loans • Loans backed by collateral that the bank can claim if the borrowers do not repay the debt

13. Bank Loans • Unsecured Loans • Loans backed only by the borrowers’ good reputation and previous credit rating • Prime Rate • Interest rates commercial banks charge their best customers (usually large corporations) for short-term loans

14. Non-Bank Liabilities • Short-term loans from insurance companies, pension funds, money market funds, or finance companies • Factoring organization • Purchases accounts receivable at a discount • Taxes and employees’ wages

15. Managing Fixed Assets • Long-term (fixed) assets: • Plants • Offices • Equipment • Heavy machinery • Automobiles

16. Capital Budgeting and Project Selection • Capital budgeting is the process of analyzing the needs of business and selecting the assets that will maximize its value • Assessing risk • Every investment in capital assets has its own risk

17. Highest Risk Introduce a New Product in Foreign Markets (risk depends on stability of country) Expand into a New Market Introduce a New Product in a Familiar Area Add to a Product Line Buy New Equipment for an Established Market Repair Old Machinery Lowest Risk Qualitative Assessment of Capital Budgeting Risk

18. Pricing Long-term Money • Factors to Consider: • How much cash will be generated • Cost of financing • Supply of funds available for investment • Accurately identifying opportunities with the greatest potential for ROI

19. Financing with Long-Term Liabilities • Debts that will be repaid over a number of years • Long-term loans • Bond issues

20. Bonds: Corporate IOUs • Debt instruments that larger companies sell to raise long-term funds. • Indenture: • The bond contract specifying all terms of agreement between bondholder and the issuing organization

21. A Basic Bond Quote

22. A Basic Stock Quote

23. Types of Bonds • Unsecured • Debentures, or bonds, that are not backed by specific collateral • Secured • Bonds that are backed by specific collateral that must be forfeited in the event the issuing firm defaults • Serial • A sequence of small bond issues of progressively longer maturity

24. Types of Bonds • Floating-rate • Bonds with interest rates that change with current interest rates otherwise available in the economy • Junk • Special type of high interest rate bond that carries higher inherent risks

25. Financing With Owners’ Equity • Owners’ equity is the owners’ investment in an organization • Common stock • Preferred stock • Retained earnings

26. Estimated Common Stock Price-Earnings Ratio and Dividends for Selected Companies

27. Investment Banking • The sale of stocks and bonds for corporations • Primary market • New issue or initial public offering (IPO) • Secondary market • Stock exchanges and OTC markets where investors trade securities with each other

28. The Securities Markets • Securities markets provide a mechanism for buying and selling securities • Organized exchanges • Central locations where investors buy and sell securities • Over-the-counter market (OTC) • A network of dealers all over the country, and world, linked by computers, telephones, and teletype machines

29. Measuring Market Performance • Indexes • Averages • Bull market • Bear market

30. The 30 Stocks in the Dow Jones Industrial Average

31. Dow’s Milestones • The Dow climbed from 860 in August 1982 to a high of 11,497 at the beginning of 2000. • The worst drop in history (684.81 points) was on September 17, 2001 after the markets were closed for 4 days following terrorist attacks on September 11 that destroyed the World Trade Center and parts of the Pentagon.

32. Solve the Dilemma • Normally, rapidly increasing sales is a good thing. What seems to be the problem here? • List the important components of a firm’s working capital. Include both current assets and current liabilities. • What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position?

33. Explore Your Career Options • What types of skills would be most useful to a financial manager? • What are some of the most stressful aspects of the job?

34. Additional Discussion Questions and Exercises • Why would a business use a lockbox to receive payments? • What are the advantages of a firm using electronic funds transfer rather than traditional check-clearing procedures? • What is a junk bond? Why do investors buy junk bonds? • What do companies do with retained earnings? • Why is the prime rate of interest important for business firms?

35. Chapter 16 Quiz • Which one of the following is an example of a current liability? • accounts receivable • marketable securities • wages payable • inventory • Which of the following is an example of a current asset? • Cash • accounts payable • accrued salaries • short-term bank loans

36. Chapter 16 Quiz • Which of the following is where new issues of stocks and bonds are sold directly to the public? • primary market • secondary market • over-the-counter market • investment banks • Dividend yield refers to • the dividend rate divided by the stock market average. • dividends per share divided by stock price. • the percentage of return an investor has earned on the original investment. • the coupon rate on bonds that change with current interest rates.

37. Multiple Choice Questions about the Video • Stocks were first traded on the NYSE in • 1776. • 1792. • 1892. • 1817. • 1972. • As interim chairman of the NYSE, John Reed earns a salary of • $10 million. • $1 million. • 100,000. • 10,000. • $1.