fm10e ch18

20
2005, Pearson Prentice Hal Chapter 18 – Chapter 18 – Working- Working- Capital Management and Capital Management and Short-term Financing Short-term Financing

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  • 1. 2005, Pearson Prentice Hall Chapter 18 Working-Capital Management and Short-term Financing

2. Working-Capital Management

  • Current Assets
    • Cash, marketable securities, inventory, accounts receivable.
  • Long-Term Assets
    • Equipment, buildings, land.
  • Which earnhigher rates of return ?
  • Which help avoid risk ofilliquidity ?

3. Working-Capital Management

  • Current Assets
    • Cash, marketable securities, inventory, accounts receivable.
  • Long-Term Assets
    • Equipment, buildings, land.
  • Risk-Return Trade-off:
  • Current assets earn low returns, but help reduce therisk of illiquidity.

4. Working-Capital Management

  • Current Liabilities
    • Short-term notes, accrued expenses, accounts payable.
  • Long-Term Debt and Equity
    • Bonds, preferred stock, common stock.
  • Which are moreexpensivefor the firm?
  • Which help avoid risk ofilliquidity ?

5. Working-Capital Management

  • Current Liabilities
    • 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 therisk of illiquidity.

6.

  • Balance Sheet
  • Current AssetsCurrent Liabilities
  • Fixed Assets Long-Term Debt
  • Preferred Stock
  • Common Stock
  • To illustrate, letsfinance all current assets with current liabilities ,

7.

  • Balance Sheet
  • Current AssetsCurrent Liabilities
  • Fixed Assets Long-Term Debt
  • Preferred Stock
  • Common Stock
  • To illustrate, lets finance allcurrent assetswithcurrent liabilities , andfinance all fixed assets with long-term financing .

8.

  • Balance Sheet
  • Current AssetsCurrent Liabilities
  • Fixed Assets Long-Term Debt
  • Preferred Stock
  • Common Stock
  • Suppose we uselong-termfinancing to finance some of ourcurrent assets .

9.

  • Balance Sheet
  • Current AssetsCurrent Liabilities
  • Fixed Assets Long-Term Debt
  • Preferred Stock
  • Common Stock
  • Suppose we uselong-termfinancing to finance some of ourcurrent assets .
  • This strategy would beless risky , butmore expensive!

10.

  • Balance Sheet
  • Current AssetsCurrent Liabilities
  • Fixed Assets Long-Term Debt
  • Preferred Stock
  • Common Stock
  • Suppose we usecurrent liabilitiesto finance some of ourfixed assets .

11.

  • Balance Sheet
  • Current AssetsCurrent Liabilities
  • Fixed Assets Long-Term Debt
  • Preferred Stock
  • Common Stock
  • Suppose we usecurrent liabilitiesto finance some of ourfixed assets .
  • This strategy would beless expensive , butmore risky !

12. The Hedging Principle

  • Permanent Assets(those held>1 year)
    • Should be financed with permanent and spontaneous sources of financing.
  • Temporary Assets(those held