SMG FE 323 Chapter Ch. 19: FE323TextbookNotesCh19

52 views6 pages

For unlimited access to Textbook Notes, a Class+ subscription is required.

FE323 Textbook Notes Ch. 19 February 8th, 2017
Working Capital Management
The Cash Cycle
o The level of working capital reflects the length of time between
when cash goes out a firm at the beginning of the production
process and when it comes back in.
Operating cycle is the average length o time between
when the firm originally purchases its inventory and when
it receives the cash back from selling its product.
Cash cycle is the length of time between when the firm
pays cash to purchase its initial inventory and when it
receives cash from the sale of the output produced from
that inventory,
Cash Conversion cycle (CCC) defined as CCC = Inventory
Days + Accounts Receivable Days Accounts Payable Days
Inventory Days = Inventory / Avg. Daily Cost of Goods
Sold
Accounts Receivable Days = Accounts Receivable / Avg.
Daily Sales
Accounts Payable Days = Accounts Payable / Avg. Cost of
Goods Sold
Working Capital Needs by Industry
Firm Value and Working Capital
Any reduction in working capital requirements generates a positive free cash
flow that the firm can distribute immediately to shareholders.
*Valuation Principle implies that the value of the firm is the present
value of its free cash flows.
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in
2
Trade Credit:
Credit that the firm is extending to its customer is known as trade
creditthe difference between receivables and payables that is the net
aout of a fi’s apital osued as a esult of those edit tasatios.
Trade Credit Terms
The Cash Discount is the percentage discount offered if the buyer
pays early
The Discount period is the number of days the buyer has to take
advantage of the cash discount; to the buyerthe total amount of time the
buyer has to pay.
Trade Credit and Market Frictions
Cost of Trade Credit: Essentially a loan from the selling firm to its
customer. The price discount represents an interest rate.
o EAR = (1 + r ) ^(n) 1
o EAR = (Rate)^(365/20) -1 = %
Benefits of Trade Credit
Simple, convenient, lower transaction costs (sometimes only funding)
Trade Credit Versus Standard Loans
Lower prices
Managing Float
The delay between the time a bill is paid and the cash is actually
eeied. Poessig float/delay ill ipat a fi’s okig apital
requirements.
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows pages 1-2 of the document.
Unlock all 6 pages and 3 million more documents.

Already have an account? Log in

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
1 Booster Class
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
1 Booster Class