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Lecture Fundamentals of financial management - Chapter 16: Financing current assets. This chapter presents the following content: Working capital financing policies, A/P (trade credit), commercial paper, S-T bank loans. | CHAPTER 16 Financing Current Assets Working capital financing policies A/P (trade credit) Commercial paper S-T bank loans Working capital financing policies Moderate – Match the maturity of the assets with the maturity of the financing. Aggressive – Use short-term financing to finance permanent assets. Conservative – Use permanent capital for permanent assets and temporary assets. Moderate financing policy Years Lower dashed line would be more aggressive. $ Perm C.A. Fixed Assets Temp. C.A. S-T Loans L-T Fin: Stock, Bonds, Spon. C.L. Conservative financing policy $ Years Perm C.A. Fixed Assets Marketable securities Zero S-T Debt L-T Fin: Stock, Bonds, Spon. C.L. Short-term credit Any debt scheduled for repayment within one year. Major sources of short-term credit Accounts payable (trade credit) Bank loans Commercial loans Accruals From the firm’s perspective, S-T credit is more risky than L-T debt. Always a required payment around the corner. May have trouble rolling over loans. Advantages and disadvantages of using short-term financing Advantages Speed Flexibility Lower cost than long-term debt Disadvantages Fluctuating interest expense Firm may be at risk of default as a result of temporary economic conditions Accrued liabilities Continually recurring short-term liabilities, such as accrued wages or taxes. Is there a cost to accrued liabilities? They are free in the sense that no explicit interest is charged. However, firms have little control over the level of accrued liabilities. What is trade credit? Trade credit is credit furnished by a firm’s suppliers. Trade credit is often the largest source of short-term credit, especially for small firms. Spontaneous, easy to get, but cost can be high. The cost of trade credit A firm buys $3,000,000 net ($3,030,303 gross) on terms of 1/10, net 30. The firm can forego discounts and pay on Day 40, without penalty. Net daily purchases = $3,000,000 / 365 = $8,219.18 Breaking down net and gross expenditures Firm buys goods . | CHAPTER 16 Financing Current Assets Working capital financing policies A/P (trade credit) Commercial paper S-T bank loans Working capital financing policies Moderate – Match the maturity of the assets with the maturity of the financing. Aggressive – Use short-term financing to finance permanent assets. Conservative – Use permanent capital for permanent assets and temporary assets. Moderate financing policy Years Lower dashed line would be more aggressive. $ Perm C.A. Fixed Assets Temp. C.A. S-T Loans L-T Fin: Stock, Bonds, Spon. C.L. Conservative financing policy $ Years Perm C.A. Fixed Assets Marketable securities Zero S-T Debt L-T Fin: Stock, Bonds, Spon. C.L. Short-term credit Any debt scheduled for repayment within one year. Major sources of short-term credit Accounts payable (trade credit) Bank loans Commercial loans Accruals From the firm’s perspective, S-T credit is more risky than L-T debt. Always a required payment around the corner. May have trouble rolling over loans. .
