CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS 2019-02-23

CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS E-mail: GRZEGORZ.MICHALSKI@UE.WROC.PL www: HTTP://MICHALSKIG.UE.WROC.PL/ Mobile: +48503452860 5 lectures + 1 exam (test) Next lecture: 14th October. J.E. Graham, Firm Value and Optimal Levels of Liquidity, Routledge 2001. T. S. Maness, J. T. Zietlow, Short-Term Financial Management, S-W Learning 2005.

Basic financial aim of the firm Firm value maximization: Where: FCFn = free cash flows, CC = cost of capital financing the firm (WACC) n = period in which FCFn will be generated

FCF – how to calculate? CC – cost of capital (cost of money), how to value?

Cash cycle & Operating Cycle

Cash cycle & Operating Cycle Operating cycle - the time period from commitment of cash for purchases until the collection of receivables resulting from the sale of goods/services. Operating cycle = Inventory period + A/cs receivable period Cash cycle - the time period from the actual outlay of cash for purchases until the collection of receivables. Cash cycle = Operating cycle - A/cs payable period

Example: Cash cycle & Operating Cycle The following information has been provided: CR = 720 Inventory = 60 Accounts receivable = 80 Accounts payable = 50 Calculate OKZAP (IP), DSO, OOSZwD, CO, CKG. If we know that operating cash will be held on the level of 2 days sale, how much money will be tied in NWC (Net Working Capital)?

How changes in curent assets influence value? CS: Inventory period = 35 days, Accounts receivable period = 26 days, accounts payable period = 20 days, Cash Revenues = 1440ooo, T=19%, calculate: Assets, if FA = 800 Capital Involved FCF0, FCF1-n, FCFn IRR Cost of Capital if D/(D+E) = 40%, kd = 10% & ke = ? kRF=7%, km=17%, NPV What will change if IP (OKZAP) is shorter? Longer? What will change if ARP (DSO) is shorter? Longer? What will change if APP (OOSZwD) is shorter? Longer?