Handout Manajemen Keuangan

1. Handout Manajemen Keuangan Working Capital Management

2. Working capital terminology • Gross working capital – total current assets. • Net working capital – current assets minus non-interest bearing current liabilities. • Working capital policy – deciding the level of each type of current asset to hold, and how to finance current assets. • Working capital management – controlling cash, inventories, and A/R, plus short-term liability management

3. Selected ratios for SKI Inc. SKI Ind. Avg. Current 1.75x 2.25x Debt/Assets 58.76% 50.00% Turnover of cash & securities 16.67x 22.22x DSO (days) 45.63 32.00 Inv. turnover 4.82x 7.00x F. A. turnover 11.35x 12.00x T. A. turnover 2.08x 3.00x Profit margin 2.07% 3.50% ROE 10.45% 21.00%

4. How does SKI’s working capital policy compare with its industry? • SKI appears to have large amounts of working capital given its level of sales. • Working capital policy is reflected in current ratio, turnover of cash and securities, inventory turnover, and DSO. • These ratios indicate SKI has large amounts of working capital relative to its level of sales. SKI is either very conservative or inefficient

5. Is SKI inefficient or just conservative? • A conservative (relaxed) policy may be appropriate if it leads to greater profitability. • However, SKI is not as profitable as the average firm in the industry. This suggests the company has excessive working capital

6. Working Capital Management • Short-Term Investment • Cash Management • Account Receivable Management • Inventory Management • Short-Term Financing • Trade Credit • Bank Loans • Commercial Paper • Account Receivable and/or Inventory Financing

8. Working Capital Management Trade-off of Short-Term Investment Cost 1 Cost 2 ___________________________________________________________________________________ • Short-Term Assets • Cash and Marketable Opportunity cost Illiquidity and solvency Securities of funds costs • Accounts receivable Cost of investment Opportunity cost of lost in accounts sales due to overly receivable and restrictive credit policy bad debts and/or terms • Inventory Carrying costs of Order and setup costs inventory, including associated with replenishment financing, and production of finished warehousing cost, goods etc.

9. Working capital financing policies • Moderate – Match the maturity of the assets with the maturity of the financing. • Aggressive – Use short-term financing to finance permanent assets. • Conservative – Use permanent capital for permanent assets and temporary assets.

10. Marketable securities $ Zero S-T Debt L-T Fin: Stock, Bonds, Spon. C.L. Perm C.A. Fixed Assets Years Conservative financing policy

11. Accrued liabilities • Continually recurring short-term liabilities, such as accrued wages or taxes. • Is there a cost to accrued liabilities? • They are free in the sense that no explicit interest is charged. • However, firms have little control over the level of accrued liabilities.

12. What is trade credit? • Trade credit is credit furnished by a firm’s suppliers. • Trade credit is often the largest source of short-term credit, especially for small firms. • Spontaneous, easy to get, but cost can be high.

13. The cost of trade credit • A firm buys $506,985 net ($512,106 gross) on terms of 1/10, net 30. • The firm can forego discounts and pay on Day 40, without penalty. Net daily purchases = $506,985 / 365 = $1,389

14. Breaking down net and gross expenditures • Firm buys goods worth $506,985. That’s the cash price. • They must pay $5,121 more if they don’t take discounts. • Think of the extra $5,121 as a financing cost similar to the interest on a loan. • Want to compare that cost with the cost of a bank loan.

15. Breaking down trade credit • Payables level, if the firm takes discounts • Payables = $1,389 (10) = $13,890 • Payables level, if the firm takes no discounts • Payables = $1,389 (40) = $55,560 • Credit breakdown Total trade credit $55,560 Free trade credit - 13,890 Costly trade credit $ 41,670

16. Nominal cost of costly trade credit • The firm loses 0.01($512,106) = $5,121 of discounts to obtain $41,670 in extra trade credit: kNOM = $5,121 / $41,670 = 0.1229 = 12.29% • The $5,121 is paid throughout the year, so the effective cost of costly trade credit is higher.

17. Nominal trade credit cost formula

18. Effective cost of trade credit • Periodic rate = 0.01 / 0.99 = 1.01% • Periods/year = 365 / (40-10) = 12.1667 • Effective cost of trade credit • EAR = (1 + periodic rate)n – 1 = (1.0101)12.1667 – 1 = 13.01%

19. Bank Loans • A firm is choosing among three alternative bank loans. The firm wishes to minimize the borrowing costs on a $200,000 borrowing. Analyze the cost of each of these alternatives: • 1. An 18% rate of interest with interest paid at year-end and no compensating balance requirement. • 2. A 16% rate of interest but carrying a 20% compensating balance requirement. This loan also calls for interest to be paid at year-end. • 3. A 14% rate of interest that is discounted, plus a 20% compensating balance requirement.

20. Bank Loans • Solutions: • 1. Effective rate of interest = 18%. • 2. Effective rate of interest • = $32,000/($200,000-$40,000) = 20%. • 3. Effective rate of interest • = $28,000/($200,000-$40,000-$28,000) • = 21.21%

21. Commercial paper (CP) • Short-term notes issued by large, strong companies. B&B couldn’t issue CP--it’s too small. • CP trades in the market at rates just above T-bill rate. • CP is bought with surplus cash by banks and other companies, then held as a marketable security for liquidity purposes.

22. Alternative Financing: Example • Suncoast Boats Inc. estimates that because of the seasonal nature of its business, it will required an additional $2m of cash for the month of July. Suncoast has the following 4 options available for raising the needed funds: • 1. Establish a 1-year line of credit for $2m with a bank. The commitment fee will be 0.5% per year on the unused portion, and the interest charge on the used funds will be 11% per annum. Assume that the funds are needed only in July, and that there are 30 days in July and 365 days in the year.

23. Alternative Financing: Example • 2. Forgo the trade discount of 2/10, net 40, on $2m of purchases during July. • 3. Issue $2m of 30-day commercial paper at a 9.5% per annum interest rate. The total transactions fee, including the cost of a backup credit line, on using commercial paper is 0.5% of the amount of the issue. • 4. Issue $2m of 60-day commercial paper at a 9% per annum interest rate, plus a transaction cost of 0.5%. Since the funds are required for only 30 days, the excess funds ($2m) can be invested in 9.4% per annum marketable securities for the month of August. The total transaction costs of purchasing and selling the marketable securities is 0.4% of the amount of the issue.

24. Alternative Financing: Example • A. What is the dollar cost of each financing arrangement? • B. Is the source with the lowest expected cost necessarily the one to select? Why or why not?

25. Alternative Financing: Example • Solutions: • a. 1. Line of credit: • Commitment fee • = (0.005)($2,000,000)(335/365) • = $ 9,178 • Interest • = (0.11)(30/365)($2,000,000) • = 18,082 • Total = $27,260

26. Alternative Financing: Example • Solutions: • 2. Trade discount: • a. = = 0.2483 = 24.83%. • Total cost = 0.2483($2,000,000)(30/365) = $40,816. • b. Effective cost = (1 + 2/98)365/30 - 1 • = 0.2786 = 27.86%. Total cost = 0.2786($2,000,000)(30/365) = $45,804.

27. Alternative Financing: Example • Solutions: • 3.30-day commercial paper: • Interest = (0.095)($2,000,000)(30/365) = $15,616 • Transaction fee = (0.005)($2,000,000) = 10,000 Total = $25,616

28. Alternative Financing: Example • Solutions: • 4.60-day commercial paper: • Interest = (0.09)($2,000,000)(60/365) = $29,589 • Transaction fee = (0.005)($2,000,000) = 10,000 • Total Costs = $39,589 • Marketable securities interest received • = (0.094)($2,000,000)(30/365) = $15,452 • Transactions cost, marketable securities • = (0.004)($2,000,000) = $8,000 • Total = $32,137 • The 30-day commercial paper has the lowest cost.