1. 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

2. 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

3. 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

4. 31- 4 LA Gear Profit & Assets

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

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

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

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

9. 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

10. 31- 10 Changes in Cash & W.C. Example - Dynamic Mattress Company Condensed Balance Sheet

11. 31- 11 Changes in Cash & W.C. Example - Dynamic Mattress Company Condensed Balance Sheet

12. 31- 12 Working Capital Simple Cycle of operations Cash Finished goods inventory Receivables Raw materials inventory

13. 31- 13 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.

14. 31- 14 Cash Budgeting Example - Dynamic Mattress Company Dynamic forecasted sources of cash AR ending balance = AR beginning balance + sales - collections

15. 31- 15 Cash Budgeting Example - Dynamic Mattress Company Dynamic collections on AR

16. 31- 16 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

17. 31- 17 Cash Budgeting Example - Dynamic Mattress Company Dynamic cash budget

18. 31- 18 Cash Budgeting Example - Dynamic Mattress Company Dynamic short term financing requirements

19. 31- 19 A Short Term Financing Plan Example - Dynamic Mattress Company Dynamic forecasted deferrable expenses

20. 31- 20 A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan

21. 31- 21 Sources of Short Term Borrowing  Bank loans  Commitment  Maturity  Rate of interest  Syndicated loans  Loan sales  Security  Commercial paper  Medium term notes

22. 31- 22 Commercial Paper  Commercial paper issued by nonfarm, nonfinancial, corporate businesses. Source: Federal Reserve Board

23. 31- 23 Web Resources www.bankofamerica.com www.directpayment.org www.nacha.org www.phoenixhecht.com www.gecfosolutions.com www.federalreserve.gov Click to access web sites Internet connection required