TAILIEUCHUNG - Financial Management - Chapter 18
• Permanent Assets (those held 1 year) – should be financed with permanent and spontaneous sources of financing. • Temporary Assets (those held • Permanent Financing – intermediate-term loans, long-term debt, preferred stock, common stock • Spontaneous Financing – accounts payable that arise spontaneously in day-to-day operations (trade credit, wages payable, accrued interest and taxes) • Short-term financing – unsecured bank loans, commercial paper, loans secured by A/R or inventory. | 2002, Prentice Hall, Inc. Ch. 18: Management and Short-Term Financing Working-Capital Management Current Assets cash, marketable securities, inventory, accounts receivable Long-Term Assets equipment, buildings, land Which earn higher rates of return? Which help avoid risk of illiquidity? Working-Capital Management Current Assets cash, marketable securities, inventory, accounts receivable Long-Term Assets equipment, buildings, land Risk-Return Trade-off: Current assets earn low returns, but help reduce the risk of illiquidity. Working-Capital Management Current Liabilities short-term notes, accrued expenses, accounts payable Long-Term Debt and Equity bonds, preferred stock, common stock Which are more expensive for the firm? Which help avoid risk of illiquidity? Working-Capital Management Current Liabilities short-term notes, accrued expenses, accounts payable Long-Term Debt and Equity bonds, preferred stock, common stock Risk-Return Trade-off: Current liabilities are less expensive, but increase the risk of illiquidity. Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock To illustrate, let’s finance all current assets with current liabilities, Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock To illustrate, let’s finance all current assets with current liabilities, Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock To illustrate, let’s finance all current assets with current liabilities, and finance all fixed assets with long-term financing. Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock To illustrate, let’s finance all current assets with current liabilities, and finance all fixed assets with long-term financing. Balance Sheet Current Assets Current Liabilities Fixed Assets Long-Term Debt Preferred Stock Common Stock Balance Sheet .
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