19- 1 mcgraw hill/irwin copyright © 2009 by the mcgraw-hill companies, inc. all rights reserved...
TRANSCRIPT
19- 1
McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Fundamentals of Corporate
Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus
Slides by
Matthew Will
Chapter 19
McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Short-Term Financial Planning
19- 2
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Topics Covered
Links Between Long-Term and Short-Term Financing
Working Capital Tracing Changes in Cash and Working Capital Cash Budgeting A Short-Term Financing Plan Sources of Short-Term Financing The Cost of Bank Loans
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Working Capital
Factors in establishing working capital levels
1.Matching maturities
2.Permanent working capital requirements
3.The advantages of liquidity
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Firm’s Cumulative Capital Requirement
Lines A, B, and C show alternative amounts of long-term finance.
Strategy A: A permanent cash surplus Strategy B: Short-term lender for part of year and borrower for
remainder Strategy C: A permanent short-term borrower
A
B
C
Year 2Year 1
Dollars
Cumulativecapital requirement
Time
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Working Capital
Net Working Capital - Current assets minus current liabilities. Often called working capital.
Cash Conversion Cycle - Period between firm’s payment for materials and collection on its sales.
Carrying Costs - Costs of maintaining current assets, including opportunity cost of capital.
Shortage Costs - Costs incurred from shortages in current assets.
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Working Capital
Simple Cycle of operations
Cash
Finished goodsinventory
ReceivablesRaw materials
inventory
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Working Capital
Cash conversion cycle
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Working Capital
COGS/365 annual
payable accounts=period payable Accounts
sales/365 annual
receivable accounts=period sreceivable Accounts
COGS/365 annual
inventory=periodInventory
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Working Capital
Example - Cash Conversion Cycle
Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle.
471A/P
703A/R5,305COGS
613Inventory5,887Sales
20072007
SheetBalanceStatementIncome
19- 10
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Working Capital
Example - Cash Conversion Cycle
Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle.
days 2.24
5,305/365
613=
COGS/365 annual
inventory =periodInventory
19- 11
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Working Capital
Example - Cash Conversion Cycle
Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle.
days 43.6=
5,887/365
703=
sales/365 annual
receivable accounts=period sReceivable
19- 12
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Working Capital
Example - Cash Conversion Cycle
Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle.
days 32.4=
365/5,305
471=
COGS/365 annual
payable accounts=period Payable
19- 13
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Working Capital
Example - Cash Conversion Cycle
Given the aggregate balance sheet and income statement for US Manufacturing firms, calculate the cash conversion cycle.
days 6.39periodInventory
days 30.3=period Payable
days 39.7=period sReceivable
Cash conversion cycle = (42.2+43.6) – 32.4 = 53.4
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Changes in Cash & W.C.
Example - Dynamic Mattress Company
11595equity sowner'11595Assets Total
and Liab Total5040Assets FixedNet
2016Depr less
7056investment Gross
Assets Fixed
7665Net Worth6555AssetsCurr Total
125Debt Term Long3025Recv Accts
2725LiabCurr Total2526Inventory
2720Payable Accts 50SecuritiesMark
05LoansBank 54Cash
sLiabilitieCurrent AssetsCurrent
20092008Equity & sLiabilitie20092008Assets
19- 15
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Changes in Cash & W.C.
Example - Dynamic Mattress CompanyIncome Statement
Sales $350
Operating Costs 321
Depreciation 4
EBIT 25
Interest 1
Pretax income 24
. Tax at 50% 12
Net Income $12
Assume
dividend = $1 mil
R.E.=$11 mil
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Changes in Cash & W.C.Example -Dynamic Mattress Company
1 $balancecash in Increase
$30 UsesTotal
1Dividend
5receivable accounts Increased
5securities marketable Purchased
14assets fixedin Invested
5loanbank short term Repaid
Uses
$31Sources Total
4onDepreciati
12incomeNet
operations fromCash
7payable accounts Increased
1sinventorie Reduced
7debt termlong Issued
Sources
19- 17
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Changes in Cash & W.C.
Example - Dynamic Mattress Company
Dynamic used cash as follows Paid $1 mil dividend. Repaid $5 mil short term bank loan Invested $14 mil Purchased $5 mil of marketable securities Accounts receivable expanded by $5 mil
19- 18
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Cash Budgeting
Steps to preparing a cash budgetStep 1 - Forecast the sources of cash.
Step 2 - Forecast uses of cash.
Step 3 - Calculate whether the firm is facing a cash shortage or surplus.
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Cash Budgeting
Example - Dynamic Mattress Company
Dynamic forecasted sources of cash
AR ending balance = AR beginning balance + sales - collections
Quarter 1st 2nd 3rd 4th
Sales, $mil 87.50 78.50 116.00 131.00
19- 20
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Cash Budgeting
Example - Dynamic Mattress Company
Dynamic collections on ARQtr
1st 2nd 3rd 4th
1. Beginning receivables 30.0 32.5 30.7 38.2
2. Sales 87.5 78.5 116.0 131.0
3. Collections
. Sales in current Qtr (80%) 70 62.8 92.8 104.8
. Sales in previous Qtr (20%) 15.0 17.5 15.7 23.2
Total collections 85.0 80.3 108.5 128.0
4. Receivables at end of period
. (4 = 1 + 2 - 3) $32.5 $30.7 $38.2 $41.2
19- 21
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Cash Budgeting
Example - Dynamic Mattress Company
Dynamic forecasted uses of cash Payment of accounts payable Labor, administration, and other expenses Capital expenditures Taxes, interest, and dividend payments
19- 22
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Cash BudgetingExample - Dynamic Mattress Company
Dynamic
cash budget
$35.0$26.0$15.0-$45.0-
uses) minus (sources
inflowcash Net
93.095.095.3131.5cash of uses Total
5.04.54.04.0dividends & interest, , taxes
8.05.51.332.5esexpenditur capital
30.030.030.030.0expensesadmin andlabor
50.055.060.065.0AP ofpayment
cash of Uses
128.0121.080.386.5Sources Total
0.012.50.01.5other
128.0108.580.385.0ARon scollection
cash of Sources
4th3rd2nd1st
Qtr
19- 23
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Cash Budgeting
Example - Dynamic Mattress Company
Dynamic short term financing requirements
Cash at start of period 5 - 40 - 55 - 29
+ Net cash flow - 45 - 15 + 26 + 35
= Cash at end of period - 40 - 55 - 29 + 6
Min operating cash balance 5 5 5 5
Cumulative short term financing
required (minimum cash balance
minus caash at end of period)
$45 $60 $34 - $1
19- 24
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Cash Budgeting
Forecast Uses of Cash
1.Payments of accounts payable.
2.Labor, administrative, and other expenses.
3.Capital expenditures.
4.Taxes, interest, and dividend payments.
19- 25
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A Short Term Financing Plan
Example - Dynamic Mattress Company
Dynamic forecasted deferrable expenses
40444852$mil ,DeferrableAmount
4th3rd2nd1stQuarter
19- 26
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A Short Term Financing Plan
Example -
Dynamic
Mattress
Company-
Financing PlanFinancing Plan
031.3940.0040.00quarter of End 13.
31.3940.0040.000quarter of Beginning 12.
credit of Line
2.98000balancescash oAddition t 11.
balancescash in Increase
31.398.6100credit of line Of 10.
015.8000payables stretched Of 9.
Repayments
0015.8045.00raisedcash Total 8.
0005.00sold Securities 7.
0015.800payables Stretched 6.
00040.00loanBank 5.
RaisedCash
34.37-24.41-15.8045.00requiredcash Total 4.
0.7900payables stretechdon 3.Interest
.63.80.800loanbank on Interest 2.
35.00-26.00-15.0045.00operationsfor Cash 1.
tsRequiremenCash
4th3rd2nd1st
Qtr
19- 27
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Sources of Short Term Financing Line of Credit
Agreement by a bank that a company may borrow at any time up to an established limit.
Bank loans Secured loans Inventory financing Commercial paper
19- 28
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Cost of Bank Loans
Simple Interest
Amount of loan X annual interest rate
number of periods in the year
Example: A bank quotes 6% annual interest on a $100,000 loan. What is the monthly simple interest?
monthper 500$12
.06 100,000
19- 29
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Cost of Bank Loans
1+1 mrateinterest annual quoted m
Effective annual rate
Example: A bank quotes 6% annual interest on a $100,000 loan, compounded monthly. What is the effective annual rate?
6.17%or 0617.1)1( 121206.
19- 30
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Cost of Bank Loans
Discount Interest
1)1(
1rateinterest annual quoted
m
m
Effective annual rate on a discount loan
Loan From ProceedsCash
PaidInterest Annual Rate Annual
19- 31
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Example:
A company can receive a 6% discount loan on $100,000.
What is the annual interest rate assuming annual payments?
What is the effective annual interest rate given monthly payments?
Cost of Bank Loans
6.38%or 0638.94,000
6,000 Rate Annual
6.20%or 062.1)1(
112
1206.
EAR
19- 32
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Cost of Bank Loans
Compensating Balance
1available funds borrowed
paidinterest actual1
m
Effective annual rate on a compensating balance loan
balance) ngCompensati -(Loan
PaidInterest Annual Rate Annual
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Cost of Bank Loans
Example:
A company can receive a 6% discount loan on $100,000, but must maintain a $20,000 compensating balance.
What is the annual interest rate assuming annual payments?
What is the effective annual interest rate given monthly payments?
7.50%or 075.20,000)-(100,000
6,000 Rate Annual
7.76%or 0776.180,000
6,0001
12
EAR