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    Fin242 Chapter 4 Latest April 2021

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    Fin242 Chapter 4 Latest April 2021

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    FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1)

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    FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1)

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    Fin242 Chapter 4 Latest April 2021

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    lauren
    FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1) FIN242 CHAPTER 4 LATEST APRIL 2021 (1)

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    of 9

    Chapter 4

    Working Capital
    Management

    FUNDAMENTAL OF FINANCE FIN242 SEPT19-JAN20


    CHAPTER OUTLINE

    1 Definition of Working Capital

    2 Basic Policies of Working Capital

    3 Approach to Working Capital Management

    4
    WC Concept

    The WCM involves day – to day Net working capital:


    01 decisions regarding investment in
    Current Assets (CA).
    02 Current assets – Current liabilities.

    Total Current Assets Working capital policy:


    03 (i.e. Marketable Sec, Cash,
    Inventories, Receivables)
    04 ◼ The level of each Current asset.
    ◼ How current assets are
    Financed?
    Managing WC WC will affect the
    involve Risk-Return Firm’s Profitability
    Trade-Off Amount of and Liquidity
    Current Asset, &
    Source of Financing
    Working
    Profitability Liquidity
    Capital Policy
    Increase
    CA Lower Higher

    Increase
    CL Higher Lower
    WC Policies
    RELAX RESTRICTED
    MODERATE
    ✔Low risk policy
    ✔Maintain large ✔High risk policy
    amount of Current ✔Mixture of ✔Maintain low
    Assets with flexible Relaxed and amount of Current
    credit policy Restricted policy Assets couple with
    ✔High liquidity & ✔Moderate Risk & Stringent credit
    potentially Low Return policy
    Profitability (i.e. low ✔Maintain Liquidity ✔Invest in Fixed
    return) from ✔Invest in Asset (i.e.
    investments due to Productive Assets productive assets),
    low productivity of and at the same which result to
    CA relative to FA time holds High Profitability
    sufficient Current but Low Liquidity
    Assets
    WC Policies
    Current Asset
    (RM) Relaxed
    Moderate
    Restricted

    Sales (RM)
    WC Financing Strategies
    Some concepts:
    How Firm Finance its Current
    ⮚Permanent Asset – hold more
    Assets
    than One Year (e.g. minimum cash Base on Risk-Return Trade-Off
    balance and inventories) (i.e. Higher Risk, Higher Return) ⮚Short-term fiancing(i.e.
    ⮚Temporary Asset – fluctuate with current liabilities) – lower cost of
    sales, < One yr (e.g. Receivable & borrowing (i.e. lower interest
    Inventory) rate), shorter duration (i.e.
    ⮚Temporary Sources of Financing payback period)
    – current liabilities (i.e. Notes ⮚Long-term financing – higher
    Payable) cost of borrowing (i.e. higher
    ⮚Permanent Sources of Financing interest rate), longer duration
    – long term finance (e.g. l/term debt, (i.e. payback period)
    preferred stocks, common stocks)
    ⮚Spontaneous Sources of
    Financing – trade credit (i.e.
    account payable) arise from day-to-
    day operation
    3 Financing Strategies (Approach)
    Hedging Approach Conservative
    Aggressive Approach Approach
    ✔Matches the maturity
    of the assets with the ✔ Uses short term financing ✔The firm uses long
    maturity of the financing to finance some permanent term financing for the
    ✔Firm use short term assets. majority of its assets
    financing to finance ✔Finance all FA with long ✔The firm supports
    temporary CA and term financing, but only a fixed, permanent
    ✔Long term financing to portion of the permanent current & average
    finance permanent assets CA would be financed by temporary CA with
    (i.e. CA & FA) long term financing. long term financing
    ✔This approach results in ✔The remaining permanent ✔This approach
    moderate risk with & the fluctuating CA would result in lower risk
    moderate returns be financed with short term with lower return
    financing.
    ✔This approach result in
    higher risk with higher
    return
    THANK YOU

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