Current assets management: value based working capital decisions

19.04.23

CURRENT ASSETS MANAGEMENT: VALUE BASED

WORKING CAPITAL

DECISIONS

Current assets management: value based working capital decisions2

CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING CAPITAL DECISIONS

E-mail: GRZEGORZ.MICHALSKI@UE.WROC.PL

www: HTTP://MICHALSKIG.UE.WROC.PL/

Mobile: 0503452860

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.

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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

n

ttt

pk

FCFV

1 1

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FCF – how to calculate?

k – cost of capital, how to value?

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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, 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 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 = 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?

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Liquid assets level & Firm Value

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Liquidity level & Profitability

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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

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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