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Chapter 6

Chapter 6. Working Capital and the Financing Decision. PPT 6-1. FIGURE 6-1 The nature of asset growth. PPT 6-2. TABLE 6-1 Yawakuzi sales forecast (in units). PPT 6-3. TABLE 6-2 Yawakuzi’s production schedule and inventory. PPT 6-4. TABLE 6-3

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Chapter 6

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  1. Chapter 6 Working Capital and theFinancing Decision

  2. PPT 6-1 FIGURE 6-1 The nature ofasset growth

  3. PPT 6-2 TABLE 6-1 Yawakuzi sales forecast(in units)

  4. PPT 6-3 TABLE 6-2 Yawakuzi’s productionschedule and inventory

  5. PPT 6-4 TABLE 6-3 Sales forecast, cash receipts and payments,and cash budget

  6. PPT 6-5 TABLE 6-4 Total current assets,first year ($millions)

  7. PPT 6-6 TABLE 6-5Cash budget and assets for second yearwith no growth in sales ($millions)

  8. FIGURE 6-4 The nature of assetgrowth (Yawakuzi) PPT 6-7

  9. PPT 6-8 FIGURE 6-5 Matching long-termand short-term needs

  10. PPT 6-9 FIGURE 6-6 Using long-term financingfor part of short-term needs

  11. PPT 6-9 FIGURE 6-7 Using short-term financingfor part of long-term needs

  12. FIGURE 6-10 Long- and short-termmonthly interest rates PPT 6-10

  13. PPT 6-11 TABLE 6-7 Alternativefinancing plans

  14. PPT 6-11 TABLE 6-8 Impact of financingplans on earnings

  15. PPT 6-12 TABLE 6-9 Expected returns underdifferent economic conditions

  16. PPT 6-12 TABLE 6-10 Expected returns forhigh-risk firm

  17. PPT 6-13 TABLE 6-11 Asset liquidity and financing assets

  18. Chapter 6 - Outline LT 6-1 • What is Working Capital Management? • Term Structure of Interest Rates • U.S. Government Securities • Short-Term vs. Long-Term Financing • Working Capital Financing Plans

  19. Working Capital Management LT 6-2 • Working Capital Management is controlling and managing the current assets of a firm • Most time-consuming job of a financial manager • Crucial to long-term success or failure of a business

  20. Term Structure of Interest Rates LT 6-3 • The Term Structure of Interest Rates is also known as the Treasury Yield Curve • Graph showing the relationship between S/T and L/T interest rates at different maturities • Normal shape is an upward sloping curve, indicating that L/T interest rates are greater than S/T interest rates

  21. U.S. Government Securities LT 6-4 Treasury Bills (T-Bills) = short-term IOUs 3 months to 1 year in maturity Treasure Notes = intermediate term 1 to 10 years in maturity Treasury Bonds = long term 10 to 40 years in maturity

  22. Short-Term vs. Long-TermFinancing LT 6-5 • Short-term financing is less expensive but riskier • Long-term financing is more expensive but less risky (or safer) • Firm must decide the appropriate “mix” • Similar to the risk-return trade-off

  23. Working Capital Financing Plans LT 6-6 • An aggressive (risky) firm: – S/T financing and low liquidity • A conservative (safe or cautious) firm: – L/T financing and high liquidity • A moderate (balanced) firm: – S/T financing and high liquidity OR – L/T financing and low liquidity • An appropriate strategy is determined based on the company’s tolerance for risk

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