CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS 2019-05-02

CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS E-mail: GRZEGORZ.MICHALSKI@UE.WROC.PL www: HTTP://MICHALSKIG.UE.WROC.PL/ Mobile: 0503452860 5 lectures + 1 exam (test) Next lecture: 20th October. T. S. Maness, J. T. Zietlow, „Short-Term Financial Management”. N. C. Hill, W. L. Sartoris, Short-term financial management: text and cases, Prentice Hall, 2004.

Basic financial aim of the firm Firm value maximization: Where: FCFn = free cash flows, k = cost of capital financing the firm(WACC) n = period in which FCFn will be generated

FCF – how to calculate? k – cost of capital, how to value?

Cash cycle & Operating Cycle

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

Example: Cash cycle & Operating Cycle The following information has been provided: CR = 720 Inventory = 60 Accounts receivable = 80 Accounts payable = 50 Calculate OKZAP, 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)?

How changes in curent assets influence value? CS: Inventory period = 35 days, Accounts receivable period = 26 days, accounts payable period = 20 days, Cash Revenues = 1234, T=19%, calculate: Assets, if FA = 800 Capital Involved FCF0, FCF1-n, FCFn IRR Cost of Capital if D/(D+E) = 40%, kd = 13% & ke = 34%. NPV What will change if IP is shorter? Longer? What will change if ARP is shorter? Longer? What will change if APP is shorter? Longer?

Liquid assets level & Firm Value

Liquidity level & Profitability

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

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