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Current assets management: value based working capital decisions
2009-10-07
CURRENT ASSETS
MANAGEMENT:
VALUE BASED
WORKING CAPITAL
DECISIONS
http://MICHALSKIG.COM/ Current assets management: value based working capital decisions
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CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING
CAPITAL DECISIONS
E-mail: GRZEGORZ.MICHALSKI@UE.WROC.PL
www: HTTP://MICHALSKIG.UE.WROC.PL/
Mobile: +48503452860
5 lectures + 1 exam (test)
Next lecture: 14th October.
J.E. Graham, Firm Value and Optimal Levels of Liquidity, Routledge
2001.
T. S. Maness, J. T. Zietlow, Short-Term Financial Management, S-W
Learning 2005.
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Basic financial aim of the firm
Firm value maximization:
Where: FCFn = free cash flows,
CC = cost of capital financing the firm (WACC)
n = period in which FCFn will be generated
n
tt
tp
CC
FCFV
1 1
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http://MICHALSKIG.COM/ Current assets management: value based working capital decisions
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FCF – how to calculate?
CC – cost of capital (cost of money), how to value?
E
DTCUL 11
RFMRFE kkkk
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Cash cycle & Operating Cycle
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http://MICHALSKIG.COM/ Current assets management: value based working capital decisions
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Cash cycle & Operating Cycle
Operating cycle - the time period from commitment of
cash for purchases until the collection of receivables
resulting from the sale of goods/services.
Operating cycle = Inventory period + A/cs receivable period
Cash cycle - the time period from the actual outlay of
cash for purchases until the collection of receivables.
Cash cycle = Operating cycle - A/cs payable period
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http://MICHALSKIG.COM/ Current assets management: value based working capital decisions
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Example: Cash cycle & Operating Cycle The following information has been provided:
— CR = 720
— Inventory = 60
— Accounts receivable = 80
— Accounts payable = 50
Calculate OKZAP (IP), DSO, OOSZwD, CO, CKG.
If we know that operating cash will be held on the level of 2 days sale,
how much money will be tied in NWC (Net Working Capital)?
turnover Inventory
360 (IP) periodInventory OKZAP
inventory Avg.
CR turnover Inventory
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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
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