Chapter 31 Principles PrinciplesofCorporateFinance Ninth Edition Short Term Financial PLanning Slides by Matthew Will Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin

31- 2 Topics Covered  Links Between Long-Term and Short-Term Financing Decisions  Tracing Changes in Cash and Working Capital  Cash Budgeting  The Short-Term Financing Plan  Sources of Short Term Borrowing

31- 3 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 Cumulative capital requirement Time

31- 4 LA Gear Profit & Assets

31- 5 LA Gear Debt & Equity Figures in $millions

31- 6 Changes in Cash & W.C. Example - Dynamic Mattress Company

31- 7 Changes in Cash & W.C. Example - Dynamic Mattress Company Assume dividend = $1 mil R.E.=$11 mil

31- 8 Changes in Cash & W.C. Example - Dynamic Mattress Company

31- 9 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

Changes in Cash & W.C. Example - Dynamic Mattress Company Condensed Balance Sheet

Changes in Cash & W.C. Example - Dynamic Mattress Company Condensed Balance Sheet

Working Capital Simple Cycle of operations Cash Finished goods inventory Receivables Raw materials inventory

Cash Budgeting Steps to preparing a cash budget Step 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.

Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted sources of cash AR ending balance = AR beginning balance + sales - collections

Cash Budgeting Example - Dynamic Mattress Company Dynamic collections on AR

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

Cash Budgeting Example - Dynamic Mattress Company Dynamic cash budget

Cash Budgeting Example - Dynamic Mattress Company Dynamic short term financing requirements

A Short Term Financing Plan Example - Dynamic Mattress Company Dynamic forecasted deferrable expenses

A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan

Sources of Short Term Borrowing  Bank loans  Commitment  Maturity  Rate of interest  Syndicated loans  Loan sales  Security  Commercial paper  Medium term notes

Commercial Paper  Commercial paper issued by nonfarm, nonfinancial, corporate businesses. Source: Federal Reserve Board

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