Transcript Slide 1

Handout Manajemen Keuangan
Working Capital Management
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Working capital terminology
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Gross working capital – total current assets.
Net working capital – current assets minus noninterest bearing current liabilities.
Working capital policy – deciding the level of each
type of current asset to hold, and how to finance
current assets.
Working capital management – controlling cash,
inventories, and A/R, plus short-term liability
management
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Selected ratios for SKI Inc.
SKI
Ind. Avg.
Current
1.75x
2.25x
Debt/Assets
58.76%
50.00%
Turnover of cash & securities
16.67x
22.22x
DSO (days)
45.63
32.00
Inv. turnover
4.82x
7.00x
F. A. turnover
11.35x
12.00x
T. A. turnover
2.08x
3.00x
Profit margin
2.07%
3.50%
ROE
10.45%
21.00%
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How does SKI’s working capital policy
compare with its industry?
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SKI appears to have large amounts of working
capital given its level of sales.
Working capital policy is reflected in current ratio,
turnover of cash and securities, inventory
turnover, and DSO.
These ratios indicate SKI has large amounts of
working capital relative to its level of sales. SKI is
either very conservative or inefficient
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Is SKI inefficient or just conservative?
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A conservative (relaxed) policy may be
appropriate if it leads to greater profitability.
However, SKI is not as profitable as the average
firm in the industry. This suggests the company
has excessive working capital
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Working Capital Management
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Short-Term Investment
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Cash Management
Account Receivable Management
Inventory Management
Short-Term Financing
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Trade Credit
Bank Loans
Commercial Paper
Account Receivable and/or Inventory Financing
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Working Capital Management
Trade-off of Short-Term Investment
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Cost 1
Cost 2
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Short-Term Assets
Cash and Marketable
Opportunity cost
Illiquidity and solvency
Securities
of funds
costs
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Accounts receivable
Cost of investment
in accounts
receivable and
bad debts
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Inventory
Carrying costs of
inventory, including
financing,
warehousing cost,
etc.
Opportunity cost of lost
sales due to overly
restrictive credit policy
and/or terms
Order and setup costs
associated with replenishment
and production of finished
goods
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Working capital financing policies
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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.
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Conservative financing policy
$
Marketable
securities
Perm C.A.
Zero S-T
Debt
L-T Fin:
Stock,
Bonds,
Spon. C.L.
Fixed Assets
Years
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Accrued liabilities
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Continually recurring short-term liabilities, such
as accrued wages or taxes.
Is there a cost to accrued liabilities?
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They are free in the sense that no explicit interest is
charged.
However, firms have little control over the level of
accrued liabilities.
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What is trade credit?
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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.
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The cost of trade credit
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A firm buys $506,985 net ($512,106 gross) on terms of
1/10, net 30.
The firm can forego discounts and pay on Day 40,
without penalty.
Net daily purchases = $506,985 / 365
= $1,389
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Breaking down net and gross expenditures
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Firm buys goods worth $506,985. That’s the cash
price.
They must pay $5,121 more if they don’t take
discounts.
Think of the extra $5,121 as a financing cost similar to
the interest on a loan.
Want to compare that cost with the cost of a bank
loan.
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Breaking down trade credit
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Payables level, if the firm takes discounts
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Payables level, if the firm takes no discounts
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Payables = $1,389 (10) = $13,890
Payables = $1,389 (40) = $55,560
Credit breakdown
Total trade credit
$55,560
Free trade credit
- 13,890
Costly trade credit $ 41,670
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Nominal cost of costly trade credit
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The firm loses 0.01($512,106)
= $5,121 of discounts to obtain $41,670 in
extra trade credit:
kNOM = $5,121 / $41,670
= 0.1229 = 12.29%
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The $5,121 is paid throughout the year, so the
effective cost of costly trade credit is higher.
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Nominal trade credit cost formula
k NOM
Discount %
365 days
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1 - Discount % Days taken - Disc. period
1
365
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
99 40 - 10
 0.1229
 12.29%
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Effective cost of trade credit
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Periodic rate = 0.01 / 0.99 = 1.01%
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Periods/year = 365 / (40-10) = 12.1667
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Effective cost of trade credit
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EAR
= (1 + periodic rate)n – 1
= (1.0101)12.1667 – 1 = 13.01%
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Bank Loans
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A firm is choosing among three alternative bank loans. The firm
wishes to minimize the borrowing costs on a $200,000 borrowing.
Analyze the cost of each of these alternatives:
1. An 18% rate of interest with interest paid at year-end and no
compensating balance requirement.
2. A 16% rate of interest but carrying a 20% compensating
balance requirement. This loan also calls for interest to be paid
at year-end.
3. A 14% rate of interest that is discounted, plus a 20%
compensating balance requirement.
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Bank Loans
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Solutions:
1. Effective rate of interest = 18%.
2. Effective rate of interest
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= $32,000/($200,000-$40,000) = 20%.
3. Effective rate of interest
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= $28,000/($200,000-$40,000-$28,000)
= 21.21%
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Commercial paper (CP)
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Short-term notes issued by large, strong companies.
B&B couldn’t issue CP--it’s too small.
CP trades in the market at rates just above T-bill
rate.
CP is bought with surplus cash by banks and other
companies, then held as a marketable security for
liquidity purposes.
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Alternative Financing: Example
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Suncoast Boats Inc. estimates that because of the
seasonal nature of its business, it will required an
additional $2m of cash for the month of July.
Suncoast has the following 4 options available for
raising the needed funds:
1. Establish a 1-year line of credit for $2m with a
bank. The commitment fee will be 0.5% per year on
the unused portion, and the interest charge on the
used funds will be 11% per annum. Assume that the
funds are needed only in July, and that there are 30
days in July and 365 days in the year.
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Alternative Financing: Example
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2. Forgo the trade discount of 2/10, net 40, on $2m of purchases
during July.
3. Issue $2m of 30-day commercial paper at a 9.5% per annum
interest rate. The total transactions fee, including the cost of a
backup credit line, on using commercial paper is 0.5% of the
amount of the issue.
4. Issue $2m of 60-day commercial paper at a 9% per annum
interest rate, plus a transaction cost of 0.5%. Since the funds are
required for only 30 days, the excess funds ($2m) can be
invested in 9.4% per annum marketable securities for the month
of August. The total transaction costs of purchasing and selling
the marketable securities is 0.4% of the amount of the issue.
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Alternative Financing: Example
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A. What is the dollar cost of each financing
arrangement?
B. Is the source with the lowest expected cost
necessarily the one to select? Why or why
not?
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Alternative Financing: Example
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Solutions:
a. 1.
Line of credit:
Commitment fee
= (0.005)($2,000,000)(335/365)
= $ 9,178
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Interest
= (0.11)(30/365)($2,000,000)
= 18,082
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Total = $27,260
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Alternative Financing: Example
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Solutions:
2. Trade discount:
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a. =
= 0.2483 = 24.83%.
Total cost = 0.2483($2,000,000)(30/365)
= $40,816.
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b. Effective cost = (1 + 2/98)365/30 - 1
= 0.2786 = 27.86%.
Total cost = 0.2786($2,000,000)(30/365)
= $45,804.
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Alternative Financing: Example
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Solutions:
3.30-day commercial paper:
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Interest = (0.095)($2,000,000)(30/365)
= $15,616
Transaction fee = (0.005)($2,000,000)
= 10,000
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Total = $25,616
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Alternative Financing: Example
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Solutions:
4.60-day commercial paper:
Interest = (0.09)($2,000,000)(60/365)
Transaction fee = (0.005)($2,000,000)
Total Costs
=
Marketable securities interest received
= (0.094)($2,000,000)(30/365)
=
Transactions cost, marketable securities
= (0.004)($2,000,000)
=
Total
=
= $29,589
= 10,000
$39,589
$15,452
$8,000
$32,137
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The 30-day commercial paper has the lowest cost.
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