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SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26

MANAJEMEN KEUANGAN - Kuliah IV 27.04.2009 SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26 CASH MANAGEMENT RWJJ CH. 26 FEUI Program Studi Maksi – PPAK Sugeng Purwanto Ph.D , FRM Tugas : Kumpulkan Ringkasan , Kesimpulan dan Komentar RWJJ Ch. 26 & Ch. 27.

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SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26

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  1. MANAJEMEN KEUANGAN - Kuliah IV 27.04.2009SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26CASH MANAGEMENT RWJJ CH. 26 FEUI Program StudiMaksi – PPAKSugeng Purwanto Ph.D, FRMTugas: KumpulkanRingkasan , KesimpulandanKomentar RWJJ Ch. 26 & Ch. 27

  2. SHORT-TERM FINANCE AND PLANNING RWJJ CH. 26

  3. DEFINING CASH IN TERMS OF OTHER ELEMENTS CURRENT ASSETS + FIXED ASSETS = CURRENT LIABILITIES + LONG TERM DEBT + EQUITY NET WORKING CAPITAL + FIXED ASSETS = LONG TERM DEBT + EQUITY Substitute: NET WORKING CAPITAL = CASH + NET WORKING CAPITAL EXCLUDING CASH CASH = LONG TERM DEBT + EQUITY – NWC EXCL. CASH – FIXED ASSETS

  4. THE SOURCES AND USES OF CASH SOURCE OF CASH Cash flow from operations: Net income $740 Depreciation 300 Total cash flow from operations 1,040 Decrease in net working capital: Increase in account payable 250 Increase in notes payable 1,000 Increase in accrued expenses 25 Increase in taxes payable 25 Total source of cash $2,340 USES OF CASH Increase in fixed assets $700 Increase in prepayments 100 Dividends 90 Increase in net working capital: Investment in inventory 1,000 Increase in accounts receivable 400 Increase in marketable securities 50 Total uses of cash $2,340 CHANGE IN CASH BALANCE $0

  5. THE OPERATING CYCLE AND THE CASH CYCLE Raw Material purchased Finished good sold Cash received Order placed Stock arrives Inventory period Accounts receivable period Accounts payable period time Firm receives invoice Cash paid for materials Operating cycle Cash cycle

  6. Class Exercise: Example 26.1

  7. SHORT - TERM FINANCIAL POLICY • The size of the firm’s investment in current assets • Flexible short-term financial policies: • Keeping large balances of cash and marketable securities • Making large investments in inventory • Granting liberal credit terms. High level of accounts receivable • Restrictive short-term financial policies: • Keeping low cash balances and no investment in marketable securities • Making small investments in inventory • Allowing no credit sales and no accounts receivable

  8. CARRYING COSTS AND SHORTAGE COSTS Total costs of holding current assets Dollar Carrying costs Minimum costs Shortage costs Restrictive policy Flexible policy Amount of current assets CA* Optimal amount of CA

  9. FINANCING POLICY FOR AN IDEALIZED ECONOMY Dollar Current assets = short-term debt Fixed assets Long-term debt plus common stock Time 0 1 2 3 4

  10. ALTERNATIVE FINANCING POLICIES FOR CURRENT ASSETS • A growing firm can be thought of as having permanent • requirement for both current assets and long-term assets. • This total assets requirement will exhibit balances over • Time reflecting: • Secular growth trend • Seasonal variation around the trend • Unpredictable day-to-day and month-to-month • fluctuations.

  11. SHORT-TERM BORROWING • What is the appropriate amount of short-term borrowing ? • Considerations: • Cash reserves • Flexible financing strategy vs restrictive financing strategy • 2. Maturity hedging • Short-term/long-term assets vs short-term/long-term loan • Term structure • Short-term interest rate are normally lower than long-term interest rates.

  12. CASH MANAGEMENT RWJJ CH. 27

  13. REASONS FOR HOLDING CASH 1. TRANSACTIONS MOTIVE 2. COMPENSATING BALANCES

  14. DETERMINING THE TARGET CASH BALANCE • The target cash balance involves a trade-off between the • opportunity costs of holding cash too much cash and the trading • costs of holding too little.

  15. TARGET CASH BALANCE Total costs of holding cash Cost in Dollars Of Holding cash Opportunity costs Minimum costs Trading costs Size of cash balance C C* Optimal size of cash balance

  16. EXAMPLE Figure 27.2 Starting cash C = $ 1,200,000 Average cash $600,000 = C/2 Ending cash 0 Weeks 0 1 2 3 4

  17. THE BAUMOL MODEL C* = [2 TF/ R]1/2 C Cash balance T Total amount new cash needed for period F Fixed cost of selling securities R Opportunity cost of holding cash

  18. THE MILLER - ORR MODEL Z* = [3 Fσ2/ (4R)]1/3 + L U* = 3 Z* - 2 L Average cash balance = (4Z – L)/3 Z* Target cash balance L Lower control limit U Upper control limit F Fixed cost of selling securities σ2 Variance R Opportunity cost of holding cash

  19. EXERCISE: DISCUSS THE IMPLICATIONS OF THE MILLER - ORR MODEL !!

  20. END

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