公司财务英文课件：Chap018 Short-Term Finance and Planning

1、Chapter 18Chapter 18Short-Term Finance Short-Term Finance and Planningand PlanningMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Understand the components of the cash cycle and why it is important Understand the pros and cons of the var

2、ious short-term financing policies Be able to prepare a cash budget Understand the various options for short-term financing18-2Chapter Outline Tracing Cash and Net Working Capital The Operating Cycle and the Cash Cycle Some Aspects of Short-Term Financial Policy The Cash Budget Short-Term Borrowing

3、A Short-Term Financial Plan18-3Sources and Uses of Cash Balance sheet identity (rearranged) NWC + fixed assets = long-term debt + equity NWC = cash + other CA CL Cash = long-term debt + equity + CL CA other than cash fixed assets Sources Increasing long-term debt, equity, or current liabilities Decr

4、easing current assets other than cash, or fixed assets Uses Decreasing long-term debt, equity, or current liabilities Increasing current assets other than cash, or fixed assets18-4The Operating Cycle Operating cycle time between purchasing the inventory and collecting the cash from sale of the inven

5、tory Inventory period time required to purchase and sell the inventory Accounts receivable period time required to collect on credit sales Operating cycle = inventory period + accounts receivable period18-5Cash Cycle Cash cycle Amount of time we finance our inventory Difference between when we recei

6、ve cash from the sale and when we have to pay for the inventory Accounts payable period time between purchase of inventory and payment for the inventory Cash cycle = Operating cycle accounts payable period18-6Figure 18.118-7Example Information Inventory: Beginning = 200,000 Ending = 300,000 Accounts

7、 Receivable: Beginning = 160,000 Ending = 200,000 Accounts Payable: Beginning = 75,000 Ending = 100,000 Net sales = 1,150,000 Cost of Goods sold = 820,00018-8Example Operating Cycle Inventory period Average inventory = (200,000+300,000)/2 = 250,000 Inventory turnover = 820,000 / 250,000 = 3.28 times

8、 Inventory period = 365 / 3.28 = 111 days Receivables period Average receivables = (160,000+200,000)/2 = 180,000 Receivables turnover = 1,150,000 / 180,000 = 6.39 times Receivables period = 365 / 6.39 = 57 days Operating cycle = 111 + 57 = 168 days18-9Example Cash Cycle Payables Period Average payab

9、les = (75,000+100,000)/2 = 87,500 Payables turnover = 820,000 / 87,500 = 9.37 times Payables period = 365 / 9.37 = 39 days Cash Cycle = 168 39 = 129 days We have to finance our inventory for 129 days If we want to reduce our financing needs, we need to look carefully at our receivables and inventory

10、 periods they both seem extensive. A comparison to industry averages would help solidify this assertion.18-10Short-Term Financial Policy Size of investments in current assets Flexible (conservative) policy maintain a high ratio of current assets to sales Restrictive (aggressive) policy maintain a lo

11、w ratio of current assets to sales Financing of current assets Flexible (conservative) policy less short-term debt and more long-term debt Restrictive (aggressive) policy more short-term debt and less long-term debt18-11Figure 18.618-12Carrying vs. Shortage Costs Managing short-term assets involves

12、a trade-off between carrying costs and shortage costs Carrying costs increase with increased levels of current assets, the costs to store and finance the assets Shortage costs decrease with increased levels of current assets Trading or order costs Costs related to safety reserves, i.e., lost sales a

13、nd customers, and production stoppages18-13Temporary vs. Permanent AssetsTemporary current assets Sales or required inventory build-up may be seasonal Additional current assets are needed during the “peak” time The level of current assets will decrease as sales occurPermanent current assets Firms ge

14、nerally need to carry a minimum level of current assets at all times These assets are considered “permanent” because the level is constant, not because the assets arent sold18-14Figure 18.418-15The nature of asset growthB. Stage II: GrowthDollarsTemporary current assetsCapital assetsTime periodPerma

15、nentcurrent assetsChoosing the Best PolicyCash reserves High cash reserves mean that firms will be less likely to experience financial distress and are better able to handle emergencies or take advantage of unexpected opportunities Cash and marketable securities earn a lower return and are zero NPV

16、investmentsMaturity hedging Try to match financing maturities with asset maturities Finance temporary current assets with short-term debt Finance permanent current assets and fixed assets with long-term debt and equityInterest Rates Short-term rates are normally lower than long-term rates, so it may

17、 be cheaper to finance with short-term debt Firms can get into trouble if rates increase quickly or if it begins to have difficulty making payments may not be able to refinance the short-term loansHave to consider all these factors and determine a compromise policy that fits the needs of the firm18-

18、17Hedged Approach to FinancinguMatch liquidity (life) of your assets to the maturity (term) of your financing uMeans your assets will be generating cash when your liabilities come due (this reduces risk)Balanced FinancinguTemporary (seasonal) build-up in inventory and accounts receivableufinance wit

19、h trade credit, short-term bank loans, short-term notes payableuPermanent (minimum) levels of inventory, receivables + Property and equipment, long-term investmentsufinance with long-term loans, leases, bonds, capital stock, retained earningsMatching long-term and short-term needsDollarsTemporary cu

20、rrent assetsCapital assetsTime periodPermanentcurrent assetsShort-termfinancingLong-termfinancing(debt & equity)Using long-term financing for part of short-term needsDollarsTemporary current assetsCapital assetsTime periodPermanentcurrent assetsShort-termfinancingLong-termfinancing(debt & equity)Dol

21、larsTemporary current assetsCapital assetsTime periodPermanentcurrent assetsShort-termfinancingLong-termfinancing(debt & equity)Using short-term financing for part of long-term needsShort-Term vs. Long-Term FinancinguShort-term financing is less expensive but riskierulower interest rates (usually)us

22、hort-term rates are volatileurisk of default if sales slow downurisk that bank may not extend / renew loansuLong-term financing is more expensive but less risky uusually higher interest rates,uyou may pay interest on funds you dont always need uyou have capital at all timesuFirm must decide the appr

23、opriate “mix”Term Structure of Interest RatesuThe Term Structure of Interest Rates is also known as the Yield CurveuA graph showing the interest rate for securities of the same risk with different maturity dates (i. e. Government of Canada bonds)uNormally, long-term rates are higher than short-term

24、ratesFigure 6-11A. Flat yield curve, March 19994.005.006.007.008.009.0012345678910 11 12 13 14 15 16YearsPercentA. Normal yield curve, July 1993C. Inverted yield curve, December 1989Yield curves showing term structure of interest rates Figure 6-13Long-term and short-term interest ratesBasic Theories

25、 - Yield Curve uLiquidity premium theoryuLong-term rates should be higher than short-term ratesuMarket segmentation theoryuTreasury securities are divided into market segments by the various financial institutions investing in the marketuExpectations hypothesisuYields on long-term securities is a fu

26、nction of short-term ratesPlan A Plan B Part 1. Current assetsTemporary . . . . . . .$250,000$250,000Permanent . . . . . . . 250,000250,000 Total current assets . . . 500,000500,000Short-term financing (6%). . 500,000150,000Long-term financing (10%) . 0350,000$500,000$500,000Part 2. Capital assetsPl

27、ant and equipment . . . .$100,000$100,000Long-term financing (10%) .$100,000$100,000 Part 3. Total financing (summary of parts 1 & 2)Short-term (6%) . . . . .$500,000$150,000Long-term (10% . . . . .100,000450,000$600,000$600,000Alternative financing plansEDWARDS CORPORATIONPlan AImpact of financing

28、plans on earningsEarnings before interest and taxes$200,000Interest (short-term), 6% $500,000 30,000Interest (long-term), 10% $100,000 10,000Earnings before taxes160,000Taxes (50%) 80,000Earnings aftertaxes$ 80,000Earnings before interest and taxes$200,000Interest (short-term), 6% $150,000 9,000Inte

29、rest (long-term), 10% $450,000 45,000Earnings before taxes146,000Taxes (50%) 73,000Earnings aftertaxes$ 73,000Plan BEDWARDS CORPORATION1. NormalExpected higher returnProbability ofExpectedconditionsunder Plan Anormal conditions outcome$7,000 .80= $5,6002. TightExpected lower returnProbability ofmone

30、yunder Plan Atight money($15,000) .20= (3,000)Expected value of return for Plan A versus Plan B= +$2,600Expected returns under different economic conditionsEDWARDS CORPORATION1. NormalExpected higher returnProbability ofExpectedconditionsunder Plan Anormal conditions outcome$7,000 .80= $5,6002. Tigh

31、tExpected lower returnProbability ofmoneyunder Plan Atight money($50,000) .20=(10,000)Expected value of return for Plan A versus Plan B =($4,400)THE OTHER CORPORATIONExpected returns for high-risk firmWorking Capital Financing PlansA conservative (safe or cautious) firm:uL/T financing and high liqui

32、dityA moderate (balanced) firm:uS/T financing and high liquidity ORuL/T financing and low liquidityAn aggressive (risky) firm:uS/T financing and low liquidityuAppropriate strategy is determined based on companys tolerance for risk Asset LiquidityFinancing PlanLow LiquidityHigh Liquidity12Short-termH

33、igh profitModerate profitHigh riskModerate risk34Long-termModerate profitLow profitModerate riskLow riskCurrent asset liquidity and asset financing planCash Budget Forecast of cash inflows and outflows over the next short-term planning period Primary tool in short-term financial planning Helps deter

34、mine when the firm should experience cash surpluses and when it will need to borrow to cover working-capital requirements Allows a company to plan ahead and begin the search for financing before the money is actually needed18-36Example: Cash Budget InformationPet Treats, Inc. specializes in gourmet

35、pet treats and receives all income from salesSales estimates (in millions)Q1 = 500; Q2 = 600; Q3 = 650; Q4 = 800; Q1 next year = 550Accounts receivableBeginning receivables = $250Average collection period = 30 daysAccounts payablePurchases = 50% of next quarters salesBeginning payables = 125Accounts

36、 payable period is 45 daysOther expensesWages, taxes, and other expense are 30% of salesInterest and dividend payments are $50A major capital expenditure of $200 is expected in the second quarterThe initial cash balance is $80, and the company maintains a minimum balance of $5018-37Example: Cash Bud

37、get Cash CollectionsACP = 30 days; this implies that 2/3 of sales are collected in the quarter made and the remaining 1/3 are collected the following quarterBeginning receivables of $250 will be collected in the first quarterQ1Q2Q3Q4Beginning Receivables250167200217Sales500600650800Cash Collections5

38、83567633750Ending Receivables16720021726718-38Example: Cash Budget Cash DisbursementsPayables period is 45 days, so half of the purchases will be paid for each quarter and the remaining will be paid the following quarterBeginning payables = $125Q1Q2Q3Q4Payment of accounts275313362338Wages, taxes and

39、 other expenses150180195240Capital expenditures200Interest and dividend payments50505050Total cash disbursements47574360762818-39Example: Cash Budget Net Cash Flow and Cash BalanceQ1Q2Q3Q4Total cash collections583567633750Total cash disbursements475743607628 Net cash inflow108-17626122Beginning Cash

40、 Balance801881238Net cash inflow108-17626122Ending cash balance1881238160Minimum cash balance-50-50-50-50Cumulative surplus (deficit)138-38-1211018-40The nature of asset growth 1110987654321InventoryCashCashAccountsreceivableInventoryTotalcurrentassetsAccountsreceivableInventory$ millionsSources of

41、Short-Term Financing There are various sources of short-term funds available to a firm:uTrade Credit from SuppliersuBank LoansuCorporate Promissory NotesuBankers AcceptancesuForeign BorrowinguLoans Against Receivables and InventoryPPT 8-3Structure of corporate debt, 2000Trade Credit from Suppliers u

42、The largest source of short-term financing for a firm-over 50%uIt is usually a 30-60 day grace period before a bill is dueuA cash discount is often given if payment is made within a specified timeuEx., 2/10 net 30 means a 2% discount is given if paid in 10 days; if not, the full amount is due in 30

43、days 36.73% or 44%Net Credit Position Net Credit Position:ua firms Accounts Receivable (A/R) minus its Accounts Payable (A/P)uif A/R is greater than A/P, it is a net provider of trade credit (positive number)uif A/P is greater than A/R, it is a net user of trade credit (negative number)ularger firms

44、 tend to be net providers of trade credit, while smaller firms are net users Types of Short-term Bank Loans Line of Credit:ucompany is able to draw upon a yearly borrowing facility arranged in advanceurevolving credits are for periods longer than 1 yearugeneral purpose loansTransaction Loan:ushort-t

45、erm loan for a specific purposeCompensating Balance:uwhen a bank requires a minimum average account balance in order to qualify for a loanucan be thought of as a form of collateraluless common than in the past Compensating Balance:uwhen a bank requires a minimum average account balance in order to q

46、ualify for a loanucan be thought of as a form of collateral and compensate the bank for its serviceuCompensating balances raise the cost of a loan, the borrower must borrow more than the amount neededAmount borrowed = amount needed/ (1-C)uless common than in the pastExample: Compensating Balance We

47、have a $500,000 line of credit with a 15% compensating balance requirement. The quoted interest rate is 9%. We need to borrow $150,000 for inventory for one year. How much do we need to borrow? 150,000/(1-.15) = 176,471 What interest rate are we effectively paying? Interest paid = 176,471(.09) = 15,

48、882 Effective rate = 15,882/150,000 = .1059 or 10.59%18-48Prime Rate and LIBORuPrime rateuThe rate a bank charges to its most creditworthy customersuIncreases as a customers credit risk increasesuLIBOR (London Interbank Offered Rate)uRate offered to companies:uHaving an international presenceuAbilit

49、y to use the London Eurodollar market for loans Prime Rate versus LIBOR on U.S. Dollar DepositsCost of Commercial Bank FinancinguEffective interest on a loan is based on the:uLoan amountuDollar interest paiduLength of the loanuMethod of repaymentEffective rate = Interest Days in the year (360) Princ

50、ipal Days loan is outstandingCost of Commercial Bank Financing (contd)uIn case of discounted loan interest is deducted in advance effective rate increasesEffective rate = Interest Days in the year (360) on discounted loan Principal-interest Days loan is outstandingRate on Installment LoansuInstallme

51、nt loans require a series of equal payments over the period of the loanuEffective rate of interest on installment loans would be almost double the quoted rate of interest Effective rate on installment loan = 2 Annual no. of payments Interest (Total no. of payments + 1) PrincipalFinancing Through Com

52、mercial PaperuCommercial paper represents a:ushort-term, unsecured promissory note uissued to the public in minimum units of $25,000(except asset backed commercial papers).uForms of commercial paper:uFinance paper/direct paper (paper sold by financial firms directly to the lender) uDealer paper (pap

53、er sold by companies through dealer network)uAsset-backed commercial paperuBook-entry transactionsuComputerized handling of commercial paper, where no actual certificate is created Total Commercial Paper OutstandingComparison of commercial paper rate to bank prime rate*Limitations on the Issuance of

54、 Commercial PaperuMany lenders have become risk-averse post a multitude of bankruptciesuFirms with downgraded credit rating do not have access to this marketuThe funds generation associated with this is less predictableuLacks the degree of commitment and loyalty associated with bank loansBankers Acc

55、eptances and Foreign Borrowing Bankers Acceptancesuto finance goods in transit (particularly imports)usold at a discountEurodollar Loans:uloans from foreign banks are called Eurodollar loans (U.S Eurodollars predominate)uforeign interest rates may be lowerAccounts Receivable FinancingA/R financing i

56、ncludes 3 choices:upledging accounts receivable as collateral for a loanuan outright sale (factoring) of receivables to a factoring companyuAsset-backed Securities: sale of receivables by large corporations in public offeringsTends to be a relatively expensive source of financingPledging accounts of

57、 receivable as collateraluConvenient means of financing. Receivables levels are rising as the need for financing is increasing.uLender screens accounts and loans a percentage (60% - 75%) of the acceptable amount.uLender has full recourse against borrower.uThe interest rate, which is usually in exces

58、s of the prime rate, is based on the frequently changing loan balance outstanding.Factoring ReceivablesuReceivables are sold, usually without recourse, to a factoring firm.uA factor provides a credit-screening function by accepting or rejecting accounts.uFactoring costs.uCommission of 1%-3% of facto

59、red invoicesuInterest on advancesFactoring Receivables ExampleuIf $100,000 a month is processed at a 1% commission, and a 12% annual borrowing rate, the total effective cost is computed on an annual basis 1%.Commission 1%.Interest for one month (12% annual/12) 2%.Total fee monthly 2%.Monthly X 12 =

60、24% annual rateuThe rate may not be considered high due to factors of risk transfer, as well as early receipt of fundsuIt also allows the firm to pass on much of the credit-checking cost to the factorExample: Factoring Last year your company had average accounts receivable of $2 million. Credit sale