CURRENT ASSETS MANAGEMENT: VALUE BASED ... assets management: value based working capital decisions 3 How changes in curent assets influence value? CS: Inventory period = 35 days,

Current assets management: value based working capital decisions

CURRENT ASSETS

MANAGEMENT:

VALUE BASED

WORKING CAPITAL

DECISIONS

(2/5)21st October 2009 @ 4pm


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CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING

CAPITAL DECISIONS

E-mail: [email protected]

www: HTTP://MICHALSKIG.UE.WROC.PL/

ph.: 0048503452860

Next lecture: 28th October 2009.

mailto:[email protected]

http://michalskig.ue.wroc.pl/


3

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?

9,0U


4

Cash cycle & Operating Cycle


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Liquid assets level & Firm Value

nn



7

Liquidity level & Profitability


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Liquidity level & Value of Liquidity

Where: vi = intrinsic (internal) value of

liquidity,

vm = market value of liquidity,

pp1 = liquidity level (1) for vi > vm

ppopt = optimal liquidity level for vi = vm

optpp

pp

ioptoptoptii dppppvppvppppppppvppvpremium

1

)()()()( 111


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Liquidity level & Value of Liquidity

Where: vi = intrinsic (internal) value of

liquidity,

vm = market value of liquidity,

pp2 = liquidity level (2) for vi < vm

ppopt = optimal liquidity level for vi = vm

2

)()()( 222

pp

pp

iioptoptim

opt

dppppvppvppppppppvvpremium


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Liquidity measurement

current ratio: current assets to current liabilities

AP

CashINVAR

sLiabilitieCurrent

AssetsCurrent

CL

CAWBPCurrRatio

Example: Calculate Current Ratio if: Inventory = 60, Accounts receivable = 80;

Accounts payable = 50; Cash and near cash = 4



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Liquidity measurement quick ratio is current assets without inventories to current

liabilities

sLiabilitieCurrent

sInventorie - assetsCurrent

CL

INVCAWPPQuickRatio

Example: Calculate Quick Ratio if: Inventory = 60, Accounts receivable = 80;

Accounts payable = 50; Cash and near cash = 4


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Short-term Financial decisions – NWC policies.

Flexible or Restrictive policy

The size of the firm’s investment in current

assets is determined by its NWC financial

policies.

—Flexible policy actions include:

keeping large cash and securities’ balances;

keeping large amounts of inventory;

granting liberal credit terms.

—Restrictive policy actions include:

keeping low cash and securities’ balances;

keeping small amounts of inventory;

allowing few or no credit sales.


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Costs of Investments in Working Capital

Need to manage the trade-off between carrying costs

and shortage costs.

Carrying costs increase with the level of investment in

current assets, and include the costs of maintaining

economic value and opportunity costs.

Shortage costs decrease with increases in the level of

investment in current assets, and include trading costs

and the costs related to being short of the current

asset.

— For example, sales lost as a result of a shortage of finished

goods inventory.


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Alternative Asset Financing Policies

Working Capital [WC] & WC financing


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Example NWC-1a.


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CURRENT ASSETS MANAGEMENT: VALUE BASED ... assets management: value based working capital decisions 3 How changes in curent assets influence value? CS: Inventory period = 35 days,