1. Ch. 18: Management and Short-Term Financing
 2002, Prentice Hall, Inc.

2. Working-Capital Management
Current Assets
cash, marketable securities, inventory, accounts receivable
Long-Term Assets
equipment, buildings, land
Which earn higher rates of return?
Which help avoid risk of illiquidity?

3. Working-Capital Management
Current Assets
cash, marketable securities, inventory, accounts receivable
Long-Term Assets
equipment, buildings, land
Risk-Return Trade-off:
Current assets earn low returns, but help reduce the risk of illiquidity.

4. Working-Capital Management
Current Liabilities
short-term notes, accrued expenses, accounts payable
Long-Term Debt and Equity
bonds, preferred stock, common stock
Which are more expensive for the firm?
Which help avoid risk of illiquidity?

5. Working-Capital Management
Current Liabilities
short-term notes, accrued expenses, accounts payable
Long-Term Debt and Equity
bonds, preferred stock, common stock
Risk-Return Trade-off:
Current liabilities are less expensive, but increase the risk of illiquidity.

6. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
To illustrate, let’s finance all current assets with current liabilities,

7. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
To illustrate, let’s finance all current assets with current liabilities,

8. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
To illustrate, let’s finance all current assets with current liabilities, and finance all fixed assets with long-term financing.

9. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
To illustrate, let’s finance all current assets with current liabilities, and finance all fixed assets with long-term financing.

10. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock

11. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
Suppose we use long-term financing to finance some of our current assets.

12. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
Suppose we use long-term financing to finance some of our current assets.

13. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
Suppose we use long-term financing to finance some of our current assets.
This strategy would be less risky, but more expensive!

14. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock

15. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
Suppose we use current liabilities to finance some of our fixed assets.

16. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
Suppose we use current liabilities to finance some of our fixed assets.

17. Balance Sheet Current Assets Current Liabilities
Fixed Assets Long-Term Debt
Preferred Stock
Common Stock
Suppose we use current liabilities to finance some of our fixed assets.
This strategy would be less expensive, but more risky!

18. Permanent Assets (those held > 1 year)
The Hedging Principle
Permanent Assets (those held > 1 year)
should be financed with permanent and spontaneous sources of financing.
Temporary Assets (those held < 1 year)
should be financed with temporary sources of financing.

19. Balance Sheet
Temporary
Current Assets

20. Balance Sheet
Temporary Temporary
Current Assets Short-term financing

21. Balance Sheet Temporary Temporary Current Assets Short-term financing
Permanent
Fixed Assets

22. Balance Sheet Temporary Temporary
Current Assets Short-term financing and
Spontaneous Financing
Permanent Permanent
Fixed Assets Financing

23. The Hedging Principle Permanent Financing Spontaneous Financing
intermediate-term loans, long-term debt, preferred stock, common stock
Spontaneous Financing
accounts payable that arise spontaneously in day-to-day operations (trade credit, wages payable, accrued interest and taxes)
Short-term financing
unsecured bank loans, commercial paper, loans secured by A/R or inventory

24. Cost of Short-Term Credit
Interest = principal x rate x time
ex: borrow $10,000 at 8.5% for 9 months
Interest = $10,000 x .085 x 3/4 year
= $637.50

25. Cost of Short-Term Credit
We can use this simple relationship:
Interest = principal x rate x time
to solve for rate, and get the

26. Cost of Short-Term Credit
We can use this simple relationship:
Interest = principal x rate x time
to solve for rate, and get the
Annual Percentage Rate (APR)

27. Cost of Short-Term Credit
We can use this simple relationship:
Interest = principal x rate x time
to solve for rate, and get the
Annual Percentage Rate (APR)
interest
principal time
APR = x

28. Cost of Short-Term Credit

29. Cost of Short-Term Credit
interest
principal time
APR = x

30. Cost of Short-Term Credit
interest
principal time
example: If you pay $ in interest on $10,000 principal for 9 months:
APR = x

31. Cost of Short-Term Credit
interest
principal time
example: If you pay $ in interest on $10,000 principal for 9 months:
APR = /10,000 x 1/.75 = .085
= 8.5% APR
APR = x

32. Cost of Short-Term Credit
Annual Percentage Yield (APY) is similar to APR, except that it accounts for compound interest:

33. Cost of Short-Term Credit
Annual Percentage Yield (APY) is similar to APR, except that it accounts for compound interest:
i m m
APY = ( )

34. Cost of Short-Term Credit
Annual Percentage Yield (APY) is similar to APR, except that it accounts for compound interest:
i m m
i = the nominal rate of interest
m = the # of compounding periods per year
APY = ( )

35. Cost of Short-Term Credit
What is the (APY) of a 9% loan with monthly payments?
APY = ( 1 + ( .09 / 12 ) ) =
= 9.38%

36. Sources of Short-term Credit
Unsecured

37. Sources of Short-term Credit
Unsecured
accrued wages and taxes

38. Sources of Short-term Credit
Unsecured
accrued wages and taxes
trade credit

39. Sources of Short-term Credit
Unsecured
accrued wages and taxes
trade credit
bank credit

40. Sources of Short-term Credit
Unsecured
accrued wages and taxes
trade credit
bank credit
commercial paper

41. Sources of Short-term Credit
Unsecured
accrued wages and taxes
trade credit
bank credit
commercial paper
Secured

42. Sources of Short-term Credit
Unsecured
accrued wages and taxes
trade credit
bank credit
commercial paper
Secured
accounts receivable loans

43. Sources of Short-term Credit
Unsecured
accrued wages and taxes
trade credit
bank credit
commercial paper
Secured
accounts receivable loans
inventory loans