1、Chapter 26: Short-Term Finance and Planning26.1Start with the basic balance sheet equation, and substitute known definitions: Assets = Liabilities + Equity Current Assets + Fixed Assets = Current Liabilities + Long-Term Debt + EquitySince Net Working Capital = Current Assets - Current Liabilities,su
2、btract Current Liabilities from both sides and substitute NWC: Net Working Capital + Fixed Assets = Long-Term Debt + Equityand we know that Current Assets = Cash + Other Current Assets, so we can substitute as: Cash + Other Current Assets - Current Liabilities = Long-Term Debt + Equity - Fixed Asset
3、sThen finally write in terms of cash: Cash = Long-Term Debt + Equity - Net Working Capital (excluding cash) - Fixed Assets26.2a. Decreaseb. Decreasec. No changed. Increasee. No changef. No changeg. Increaseh. No changei. Increasej. Decreasek. Increasel. No changem. No changen. No changeo. Decreasep.
4、 Decreaseq. No changer. Decrease26.3 Sources and Uses of Cash20X6Sources of cash:Cash from operations Net income$68,600 Depreciation5,225Decrease in net working capital Increase in accounts payable5,500New stock3,000 Total sources of cash$82,325Uses of cash:Increase in fixed assets$12,725Dividends30
5、,800Increase in net working capital Investment in inventory3,750 Increase in accounts receivable9,750 Decrease in accrued expenses3.300Decrease in long-term debt15,000 Total uses of cash $75,325Change in cash balance$7,00026.4Following example in Tables 26.1 & 26.2:Sources and Uses of Cash20X6Source
6、s of cash:Cash from operations Net income$83,000 Depreciation50,000 Total cash flow from operations133,000Decrease in net working capital Decrease in inventory114,000 Increase in accounts payable23,000 Increase in loans payable376,000 Total sources of cash$646,000Uses of cash:Increase in fixed asset
7、s$139,000Dividends100,000Increase in net working capital Increase in accounts receivable251,000 Decrease in taxes payable132,000 Decrease in accrued expenses11,000 Total uses of cash$633,000Change in cash balance$13,00026.5First find the applicable component ratios:Inventory turnover ratio = Receiva
8、ble turnover ratio = Accounts payable turnover ratio = Days in inventory = Days in receivables = Days in payables = a.Operating cycle = b.Cash cycle = 26.6a.The operating cycle begins when inventory stock arrives at a firm and ends when cash is collected from receivables. The operating cycle is also
9、 the sum of the cash cycle and the accounts payable period.b.The cash cycle begins when cash is paid for materials and ends when cash is collected from receivables. The cash cycle is the time between cash disbursement and cash collection.c.The accounts payable period is the length of time the firm i
10、s able to delay payment on the purchase of manufacturing resources.26.7Cash cycleOperating cyclea.DecreaseNo changeb.No changeDecreasec.IncreaseNo changed.DecreaseDecreasee.IncreaseIncreasef.DecreaseDecrease26.8 a.A flexible short-term financing policy maintains a high ratio of current assets to sal
11、es. The policy includes limited use of short-term debt and heavy reliance on long-term debt.b.A restrictive short-term financing policy entails a low ratio of current assets to sales. This policy relies upon the use of short-term liabilities.c.If carrying costs are low and/or shortage costs are high
12、, a flexible short-term financing policy is optimal.d.If carrying costs are high and/or shortage costs are low, a restrictive short-term financing policy is optimal.26.9Shortage costs are those costs incurred by a firm when its investment in current assets is low. These costs are of two types.i.Trad
13、ing or order costs. Order costs are the costs of placing an order for more cash or more inventory.ii.Costs related to safety reserves. These costs include lost sales, lost customer goodwill and disruption of production schedules.26.10a.The current assets of Cleveland Compressor are financed largely
14、by retained earnings. From 20X1 to 20X2, total current assets grew by $7,212. Only $2,126 of this increase was financed by the growth of current liabilities. Pnew York Pneumatics current assets are largely financed by current liabilities. Bank loans are the most important of these current liabilitie
15、s. They grew $3,077 to finance an increase in current assets of $8,333.b.Cleveland Compressor holds the larger investment in current assets. It has current assets of $92,616 while Pnew York Pneumatic has $78,434 in current assets. The main reason for the difference is the larger sales of Cleveland C
16、ompressor.26.10(continued)c.Cleveland Compressor is more likely to incur shortage costs because the ratio of current assets to sales is 0.57. That ratio for Pnew York Pneumatic is 0.86. Similarly, Pnew York Pneumatic is incurring more carrying costs for the same reason, a higher ratio of current ass
17、ets to sales.26.11A long-term growth trend in sales will require some permanent investment in current assets. Thus, in the real world, net working capital is not zero. Also, the variation across time for assets means that net working capital is unlikely to be zero at any point in time.26.12a.To solv
18、e this problem you must assume that all sales are on credit and the remaining 30% of credit sales (100% - 30% - 40%) are never collected. They are bad debts that are written off the books.Let S be the sales in December. 30% of S will be collected in December and 40% of S will be collected in January
19、. You are told that the balance of Account Receivables at the end of December is $36,000, and $30,000 of that amount is uncollected December sales.Since 30% of December sales are collected in December, that $30,000 must be 70% of December sales: 0.7S = $30,000 S = $42,857b.DecemberJanuaryFebruaryMar
20、chCredit sales$42,875$90,000$100,000$120,000.3(42875).3(90000).3(100000).3(120000)Collections of current month=12,875=27,000=30,000=36,000.4(42875).4(90000).4(100000)Collections of previous month=17,143=36,000=40,000January: $27,000 + $17,143 = $44,143February: $30,000 + $36,000 = $66,000March: $36,
21、000 + $40,000 = $76,00026.13Quarter1234Sales (basic trend), millions100120144172.8Seasonal adjustments0-10-515Sales projections100110139187.8Collection within month303341.756.34 30% of current month adj salesCollection next month505569.5 50% of previous month adj salesCash Collection from Sales8396.
22、7125.8426.14First find the total collections of each month of the quarter:Credit sales and CollectionsSecond Quarter, 20X5MarchAprilMayJune Credit sales $180,000$160,000$140,000$192,000 Collections of current month80,00070,00096,000 50% of current sales Collections of previous month72,00064,00056,00
23、0 40% of previous sales Total Collections$152,000$134,000$152,000Now, apply those data with those provided in the problem to complete the cash budget:Cash BudgetSecond Quarter, 20X5AprilMayJuneBeginning cash balance$200,000$226,000$282,000Cash receipts: Collections152,000134,000152,000 Total cash av
24、ailable$352,000$360,000$434,000Cash disbursements: Pay credit purchases$65,000$68,000$64,000 Wages, taxes, expenses 8,0007,0008,400 Interest3,0003,0003,000 Equipment purchases50,00004,000 Total cash disbursed$126,000$78,000$79,400Ending cash balance$226,000$282,000$354,60026.15The considerations in
25、determining the most appropriate amount of short-term borrowing are:i.Cash reserves. Flexible financing strategy can reduce financial distress possibility, but it may reduce the return on equity.ii.Maturity hedging. Financing long-term assets with short-term borrowing is inherently risky as the shor
26、t-term interest rate is more volatile.iii.Term structure. On average, long-term borrowing is more costly than short-term borrowing.26.16Short-term external financing options include:i.unsecured loans that can be either committed or uncommitted lines of credit.ii.secured loans that include blanket inventory lien, trust receipt, field-warehouse financing etc.iii.other sources like bankers acceptances, commercial paper, ., etc.B-430