公司理财教学资料cha.ppt

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1、Chapter 18-20Working capital management,2023/5/26,Main topics,Some Aspects of Short-Term Financial PolicyCash Budget and liquidity managementCredit policy and accounts receivable management Inventory managementShort-Term Borrowing,18-2,2023/5/26,Short-Term Financial Policy,Size of investments in cur

2、rent assetsFlexible(conservative)policy maintain a high ratio of current assets to salesRestrictive(aggressive)policy maintain a low ratio of current assets to salesCompromise policy-maintain a tradeoff ratio of current assets to sales,18-3,2023/5/26,Carrying vs.Shortage Costs,Managing short-term as

3、sets involves a trade-off between carrying costs and shortage costsCarrying costs increase with increased levels of current assets,the costs to store and finance the assetsShortage costs decrease with increased levels of current assetsTrading or order costsCosts related to safety reserves,i.e.,lost

4、sales and customers,and production stoppages,18-4,2023/5/26,Temporary vs.Permanent Assets,Temporary current assetsSales or required inventory build-up may be seasonalAdditional current assets are needed during the“peak”timeThe level of current assets will decrease as sales occurPermanent current ass

5、etsFirms generally need to carry a minimum level of current assets at all timesThese assets are considered“permanent”because the level is constant,not because the assets arent sold,18-5,2023/5/26,Figure 18.4,18-6,2023/5/26,Financing of current assetsFlexible(conservative)policy less short-term debt

6、and more long-term debtRestrictive(aggressive)policy more short-term debt and less long-term debtCompromise policy-long-term debt for permanent current assets and short-term-debt for temporary current assets,2023/5/26,Figure 18.6,18-8,2023/5/26,Choosing the Best Policy,Cash reservesHigh cash reserve

7、s mean that firms will be less likely to experience financial distress and are better able to handle emergencies or take advantage of unexpected opportunitiesCash and marketable securities earn a lower return and are zero NPV investmentsMaturity hedgingTry to match financing maturities with asset ma

8、turitiesFinance temporary current assets with short-term debtFinance permanent current assets and fixed assets with long-term debt and equityInterest RatesShort-term rates are normally lower than long-term rates,so it may be cheaper to finance with short-term debtFirms can get into trouble if rates

9、increase quickly or if it begins to have difficulty making payments may not be able to refinance the short-term loansHave to consider all these factors and determine a compromise policy that fits the needs of the firm,18-9,2023/5/26,Cash management,Why should firm hold cash?How much cash should a fi

10、rm hold?How to forecast and management cash?,2023/5/26,Reasons for Holding Cash,Speculative motive hold cash to take advantage of unexpected opportunitiesPrecautionary motive hold cash in case of emergenciesTransaction motive hold cash to pay the day-to-day billsTrade-off between opportunity cost of

11、 holding cash relative to the transaction cost of converting marketable securities to cash for transactions,19-11,2023/5/26,Costs of Holding Cash,C*,Costs in dollars of holding cash,Size of cash balance,The investment income foregone when holding cash.,Trading costs increase when the firm must sell

12、securities to meet cash needs.,19A-12,The BAT Model,F=The fixed cost of selling securities to raise cashT=The total amount of new cash neededR=The opportunity cost of holding cash,i.e.,the interest rate,Time,1 2 3,If we start with$C,spend at a constant rate each period and replace our cash with$C wh

13、en we run out of cash,our average cash balance will be,19A-13,The BAT Model,Time,As we transfer$C each period we incur a trading cost of F.,1 2 3,19A-14,The BAT Model,C*,Size of cash balance,19A-15,The BAT Model,Opportunity Costs=Trading Costs,The optimal cash balance is found where the opportunity

14、costs equals the trading costs.,Multiply both sides by C,19A-16,The Miller-Orr Model,The firm allows its cash balance to wander randomly between upper and lower control limits.,$,Time,When the cash balance reaches the upper control limit U,cash is invested elsewhere to get us to the target cash bala

15、nce C.,When the cash balance reaches the lower control limit,L,investments are sold to raise cash to get us up to the target cash balance.,19A-17,The Miller-Orr Model Math,Given L,which is set by the firm,the Miller-Orr model solves for C*and U,where s2 is the variance of net daily cash flows.The av

16、erage cash balance in the Miller-Orr model is:,19A-18,Implications of the Miller-Orr Model,To use the Miller-Orr model,the manager must do four things:Set the lower control limit for the cash balance.Estimate the standard deviation of daily cash flows.Determine the interest rate.Estimate the trading

17、 costs of buying and selling securities.,19A-19,Implications of the Miller-Orr Model,The model clarifies the issues of cash management:The optimal cash position,C*,is positively related to trading costs,F,and negatively related to the interest rate R.C*and the average cash balance are positively rel

18、ated to the variability of cash flows.,19A-20,Operating Cycle and Cash Cycle method,Operating cycle time between purchasing the inventory and collecting the cash from sale of the inventoryInventory period time required to purchase and sell the inventoryAccounts receivable period time required to col

19、lect on credit salesOperating cycle=inventory period+accounts receivable period,18-21,2023/5/26,Cash Cycle,Cash cycleAmount of time we finance our inventoryDifference between when we receive cash from the sale and when we have to pay for the inventoryAccounts payable period time between purchase of

20、inventory and payment for the inventoryCash cycle=Operating cycle accounts payable period,18-22,2023/5/26,Figure 18.1,18-23,2023/5/26,Other Factors Influencing the Target Cash Balance,BorrowingBorrowing is likely to be more expensive than selling marketable securities.The need to borrow will depend

21、on managements desire to hold low cash balances.,19A-24,Cash Budget,Forecast of cash inflows and outflows over the next short-term planning periodPrimary tool in short-term financial planningHelps determine when the firm should experience cash surpluses and when it will need to borrow to cover worki

22、ng-capital requirementsAllows a company to plan ahead and begin the search for financing before the money is actually needed,18-25,2023/5/26,Example:Cash Budget Information,Pet Treats,Inc.specializes in gourmet pet treats and receives all income from salesSales estimates(in millions)Q1=500;Q2=600;Q3

23、=650;Q4=800;Q1 next year=550Accounts receivableBeginning receivables=$250Average collection period=30 daysAccounts payablePurchases=50%of next quarters salesBeginning payables=125Accounts payable period is 45 daysOther expensesWages,taxes,and other expense are 30%of salesInterest and dividend paymen

24、ts are$50A major capital expenditure of$200 is expected in the second quarterThe initial cash balance is$80,and the company maintains a minimum balance of$50,18-26,2023/5/26,Example:Cash Budget Cash Collections,ACP=30 days;this implies that 2/3 of sales are collected in the quarter made and the rema

25、ining 1/3 are collected the following quarterBeginning receivables of$250 will be collected in the first quarter,18-27,2023/5/26,Example:Cash Budget Cash Disbursements,Payables period is 45 days,so half of the purchases will be paid for each quarter and the remaining will be paid the following quart

26、erBeginning payables=$125,18-28,2023/5/26,Example:Cash Budget Net Cash Flow and Cash Balance,18-29,2023/5/26,Short-Term Financial Plan,18-30,2023/5/26,Credit and Receivables,Granting credit increases salesCosts of granting creditChance that customers wont payFinancing receivablesCredit management ex

27、amines the trade-off between increased sales and the costs of granting credit,2023/5/26,20-31,Components of Credit Policy,Terms of saleCredit periodCash discount and discount periodType of credit instrumentCredit analysis distinguishing between“good”customers that will pay and“bad”customers that wil

28、l defaultCollection policy effort expended on collecting on receivables,2023/5/26,20-32,The Cash Flows from Granting Credit,2023/5/26,20-33,Terms of Sale,Basic Form:2/10 net 452%discount if paid in 10 daysTotal amount due in 45 days if discount not takenBuy$500 worth of merchandise with the credit t

29、erms given abovePay$500(1-.02)=$490 if you pay in 10 daysPay$500 if you pay after 10 days,must be paid by 45 days,2023/5/26,20-34,Example:Cash Discounts,Finding the implied interest rate when customers do not take the discountCredit terms of 2/10 net 45 and$500 loan$10 interest(.02*500)Period rate=1

30、0/490=2.0408%Period=(45 10)=35 days365/35=10.4286 periods per yearEAR=(1.020408)10.4286 1=23.45%The company benefits when customers choose to forego discounts,2023/5/26,20-35,Length of Credit Period,Influenced by the following factors:Perishability and collateral valueConsumer demandCost,profitabili

31、ty,and standardizationCredit riskSize of the accountCompetitionCustomer type,2023/5/26,20-36,Analyzing Credit Policy,Revenue EffectsDelay in receiving cash from saleMay be able to increase priceMay increase total salesCost Effects cost of sale is still incurred even though the cash from the sale has

32、 not been receivedCost of debt must finance receivablesProbability of nonpayment some percentage customers will not pay for products purchasedCash discount some customers will pay early and pay less than the full sales price,2023/5/26,20-37,Example:Evaluating a Proposed Policy Part I,Your company is

33、 evaluating a switch from a cash only policy to a net 30 policy.The price per unit is$100 and the variable cost per unit is$40.The company currently sells 1,000 units per month.Under the proposed policy the company will sell 1,050 units per month.The required monthly return is 1.5%.What is the NPV o

34、f the switch?Should the company offer credit terms of net 30?,2023/5/26,20-38,Example:Evaluating a Proposed Policy Part II,Incremental cash inflow(100 40)(1,050 1,000)=3,000Present value of incremental cash inflow3000/.015=200,000Cost of switching100(1,000)+40(1,050 1,000)=102,000NPV of switching200

35、,000 102,000=98,000Yes,the company should switch,2023/5/26,20-39,Optimal Credit Policy,Carrying costsRequired return on receivablesLosses from bad debtsCosts of managing credit and collectionsShortage costsLost sales due to a restrictive credit policyTotal cost curveSum of carrying costs and shortag

36、e costsOptimal credit policy is where the total cost curve is minimized,2023/5/26,20-40,Figure 20.1 The Costs of Granting Credit,2023/5/26,20-41,Credit Analysis,Process of deciding which customers receive creditGathering informationFinancial statementsCredit reportsBanksPayment history with the firm

37、Determining Creditworthiness5 Cs of CreditCredit Scoring,2023/5/26,20-42,Five Cs of Credit,Character willingness to meet financial obligationsCapacity ability to meet financial obligations out of operating cash flowsCapital financial reservesCollateral assets pledged as securityConditions general ec

38、onomic conditions related to customers business,2023/5/26,20-43,Credit Information,Financial statementsCredit reports with customers payment history to other firmsBanksPayment history with the company,2023/5/26,20-44,Collection Policy,Monitoring receivablesKeep an eye on average collection period re

39、lative to your credit termsUse an aging schedule to determine percentage of payments that are being made lateCollection policyDelinquency letterTelephone callCollection agencyLegal action,2023/5/26,20-45,Inventory Management,Inventory can be a large percentage of a firms assetsCosts associated with

40、carrying too much inventoryCosts associated with not carrying enough inventoryInventory management tries to find the optimal trade-off between carrying too much inventory versus not enough,2023/5/26,20-46,Types of Inventory,Manufacturing firmRaw material starting point in production processWork-in-p

41、rogressFinished goods products ready to ship or sellRemember that one firms“raw material”may be another companys“finished good”Different types of inventory can vary dramatically in terms of liquidity,2023/5/26,20-47,Inventory Costs,Carrying costs range from 20 40%of inventory value per yearStorage a

42、nd trackingInsurance and taxesLosses due to obsolescence,deterioration or theftOpportunity cost of capitalShortage costsRestocking costsLost sales or lost customersConsider both types of costs and minimize the total cost,2023/5/26,20-48,Economic Order Quantity(EOQ)Model,The EOQ model minimizes the t

43、otal inventory costTotal carrying cost=(average inventory)x(carrying cost per unit)=(Q/2)(CC)Total restocking cost=(fixed cost per order)x(number of orders)=F(T/Q)Total Cost=Total carrying cost+total restocking cost=(Q/2)(CC)+F(T/Q),2023/5/26,20-49,Example:EOQ,Consider an inventory item that has car

44、rying cost=$1.50 per unit.The fixed order cost is$50 per order and the firm sells 100,000 units per year.What is the economic order quantity?,2023/5/26,20-50,Extensions,Safety stocksMinimum level of inventory kept on handIncreases carrying costsReorder pointsAt what inventory level should you place

45、an order?Need to account for delivery timeDerived-Demand InventoriesMaterials Requirements Planning(MRP)Just-in-Time Inventory,2023/5/26,20-51,Inventory Management Techniques ABC Approach,Classify inventory by cost,demand and needThose items that have substantial shortage costs should be maintained

46、in larger quantities than those with lower shortage costsGenerally maintain smaller quantities of expensive itemsMaintain a substantial supply of less expensive basic materials,2023/5/26,20-52,Short-Term Borrowing,Unsecured LoansLine of creditCommitted vs.noncommittedRevolving credit arrangementLett

47、er of creditSecured LoansAccounts receivable financingAssigningFactoringInventory loansBlanket inventory lienTrust receiptField warehouse financingCommercial PaperTrade Credit,18-53,2023/5/26,Example:Compensating Balance,We have a$500,000 line of credit with a 15%compensating balance requirement.The

48、 quoted interest rate is 9%.We need to borrow$150,000 for inventory for one year.How much do we need to borrow?150,000/(1-.15)=176,471What interest rate are we effectively paying?Interest paid=176,471(.09)=15,882Effective rate=15,882/150,000=.1059 or 10.59%,18-54,2023/5/26,Example:Factoring,Last year your company had average accounts receivable of$2 million.Credit sales were$24 million.You factor receivables by discounting them 2%.What is the effective rate of interest?Receivables turnover=24/2=12 timesAPR=12(.02/.98)=.2449 or 24.49%EAR=(1+.02/.98)12 1=.2743 or 27.43%,18-55,2023/5/26,