1. CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS

2. CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS
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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.

3. 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

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

5. Cash cycle & Operating Cycle

6. 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

7. 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)?

8. 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?

11. Liquid assets level & Firm Value

12. Liquidity level & Profitability

13. 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

14. 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