Current assets management: value based working capital decisions

2009-10-07

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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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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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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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?

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