CHAPTER SEVEN (II)*

MARKETABLE SECURITIESCash not needed for transactions should be held in interest-earning marketable securities.The choice of security should depend on yield, maturity, investment size, safety, and marketability.The relation between yield to maturity and time to maturity is normally positive and is represented by the yield curve:i.e. the longer the maturity period of the security, the higher the yield.Because the risk is greater as the maturity date is extended.*

COMMON MARKETABLE SECURITIESTreasury bills:Short-term obligations of the federal government.Usually issued with maturities of 91 days and 182 days.Trade on a discount bases, where the yield you receive occurs as a result of the difference between the price you pay and the maturity value.Treasury notes:Government obligations with a maturity of 1 to 10 years.

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COMMON MARKETABLE SECURITIESTreasury inflation protection securities (TIPS):Pays interest semiannually that equals a real rate of return specified by the U.S. Treasury.Plus principal at maturity that is adjusted annually to reflect inflations impact on purchasing power.Federal agency securities:Guarantee by the issuing agency and provide all the safety.There is an secondary market for agency securities that allows investor to sell and outstanding issue in an active and liquid market before the maturity date.Pay slightly higher yields than direct Treasury issues.

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COMMON MARKETABLE SECURITIESCertificate of deposit (CD):Offered by commercial banks, savings and loans and other financial institutions.The investor place funds on deposit at a specified rate over a given period as evidenced b the certificate received.Consists of small CDs from $500 to $10,000 with lower interest rate, and larger CDs from $100,000 and more with higher interest.Commercial paper:Unsecured promissory notes issued to the public by large business corporations.Commercial paper usually held to maturity by original investor with no active secondary market.*

COMMON MARKETABLE SECURITIESBankers acceptance:Short-term securities that generally arise from foreign trade.A draft drawn on a bank for payment when presented to the bank.Difference from a check is that a company does not have to deposit fund at the bank to cover the draft until the bank has accepted the draft for payment and presented it to the company.Eurodollar certificate of deposit:U.S. dollars held on deposit by foreign banks and in turn lent by banks to anyone seeking dollars.*

COMMON MARKETABLE SECURITIESPassbook savings account:The lowest yielding investment at a bank.Money market fund:An investment fundthat holds theobjective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. Mutual funds, brokerage firms and banks offer these funds. Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.

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MANAGEMENT OF ACCOUNTS RECEIVABLEAs sales expanding, the portion of investment in corporate assets (accounts receivable) increase.There are three primary policy variables to consider in conjunction with our profit objective:Credit standardsTerms of tradeCollection policy*

MANAGEMENT OF ACCOUNTS RECEIVABLECredit policy:The firm must determine the nature of the credit risk on the basis of prior records of payment, financial stability, current net worth and other factors.Account receivable is created when credit extended to the customer who is expected to repay according to the terms of trade.Bankers sometimes refer to the 5Cs of credit character, capital, capacity, conditions and collateral, as an indication of loan repaid possibility.

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MANAGEMENT OF ACCOUNTS RECEIVABLECredit policy (cont):Character moral and ethical quality of the individual who is responsible for repaying the loan.Capital is the level of financial resources available to the company seeking the loan and involves an analysis of debt to equity and the firms capital structure.Capacity refers to the availability and sustainability of the firms cash flow at a level high enough to pay off the loan.Conditions refers to the sensitivity of the operating income and cash flows to the economy.Collateral is determined by assets that can be pledged against the loan. Where companies can pledge assets that are available to be sold by the lender if the loan is not repaid.

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MANAGEMENT OF ACCOUNTS RECEIVABLETerms of trade:The stated terms of credit extension will have a strong impact on the eventual size of the accounts receivable balance.In establishing credit terms, the firm should also consider the use of cash discount.Offering the terms 2/10, net 30 meaning allows deduction of 2 percent to customer from the face amount of the bill when paying within the first 10 days, but if the discount is not taken, the customer must pay the full amount within 30 days.*

MANAGEMENT OF ACCOUNTS RECEIVABLECollection policy:In assessing collection policy, a number of quantitative measures may be applied to the credit department of the firm:Average collection period taking accounts receivable divided by average daily credit sales.Ratio of bad debts to credit sales an increasing ratio may indicate too many weak accounts or an aggressive market expansion policy.Aging of accounts receivables one way of finding out if customers are paying their bills within the time prescribed in the credit terms.

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INVENTORY MANAGEMENTFor manufacturer, inventory are divided into three basic categories:Raw materials used in productWork in progress, partially finished goodsFinished or completed goodsAll these forms of inventory need to be financed and their efficient management can increase a firms profitability.The amount of inventory is affected by sales, production and economic conditions.*

INVENTORY MANAGEMENT:LEVEL VS SEASONAL PRODUCTIONA manufacturer must determine whether a plan of level or seasonal production should be followed.Level production is proportionally produce in all year long.Adopting level production for seasonal businesses result high inventory buildups.*

INVENTORY MANAGEMENT:INVENTORY POLICY IN INFLATIONFor instable material price, firm can be partially controlled by taking moderate inventory position, i.e. do not fully commit at one price.Or, by hedging with a futures contract to sell at a stipulated price some months from now.*

INVENTORY MANAGEMENT:INVENTORY DECISION MODELIn developing an inventory model, two basic costs associated with inventory:Carrying cost include interest on funds ties up in inventory and the costs of warehouse space, insurance premiums and material handling expenses. Also, implicit cost associated with the dangers of obsolescence or perishability.Ordering cost cost of ordering and processing inventory into stock. If average inventory is low, orders must ne many times and causes ordering cost higher.*

INVENTORY MANAGEMENT:INVENTORY DECISION MODELEconomic ordering quantity (EOQ) = 2SO/CS total sales in unitsO ordering cost for each orderC carrying cost per unit in dollarsIt refers to the most advantageous amount for the firm to order each time.

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INVENTORY MANAGEMENT:SAFETY STOCK AND STOCK OUTSA stock outs occurs when a firm is out of a specific inventory item and is unable to sell or deliver the product.The risk of losing sales to a competitor may cause a firm to hold a safety stock to reduce this risk.A safety stock will guard against late deliveries due to weather, production delays, equipment breakdowns and the many other things that can go wrong between the placement of an order and its delivery.*

INVENTORY MANAGEMENT:SAFETY STOCK AND STOCK OUTSA minimum safety stock will increase the cost of inventory because the carrying cost will rise.This cost should be offset by eliminating lost profits on sales due to stock outs and also by increased profits from unexpected orders that can now be filled.

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INVENTORY MANAGEMENT:JUST-IN-TIME INVENTORY

Just-in-time management (JIT) was designed for Toyota by Japanese firm Shigeo Shingo.Several basic requirement:Quality production that continually satisfies customer requirements.Close ties between suppliers, manufacturer and customers.Minimization of the level of inventory.

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INVENTORY MANAGEMENT:JUST-IN-TIME INVENTORY

Usually supplier are located near manufacturers and are able to make orders in small lot sizes because of short delivery times.Computerized ordering/inventory tracking systems both on the assembly line and in suppliers production facility are necessary for JIT to work.*

THANK YOU*

TUTORIAL QUESTIONSExplain each type of common marketable securities.What are the three quantitative measures that can be applied to the collection policy?What are the 5Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid?Why might a firm keep a safety stock and what effects is it likely to have on carrying cost of inventory?Explain the just-in-time management.*

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