SU5: Working Capital Flashcards
Net Working Capital
Current Assets - Current Liabilities
Permanent Working Capital
Minimum level of current assets maintained by the firm, usually financed with long term debt.
Current Ratio
Current Assets / Current Liabilities
Quick Ratio or Acid Test Ratio
Quick Assets / Current Liabilities
Economic Order Quantity
sq root of (2bT/i)
b = fixed cost per transaction
T = total demand for cash
i=intrest rate on marketable securities
Annual Benefit of receiving cash earlier
Daily Cash Receipts x Days of Reduced Float x Opportunity Cost of Funds
The three motives for holding cash are
Transactional Motive, precautionary motive and the speculative motive
T-Bills
1 year or less, no coupon rate, sold at a discount
T-Notes
Maturities of 1-10 years, interest paid every 6 months
T-Bonds
Maturities of 10 years or longer. Interest payment every 6 months.
Repos
Repurchase agreement - a means for dealers in government securities to finance their portfolios.
Commercial Paper
Unsecured, short-term ntoes issued by large companies that are very good credit risks
CD’s
Certificate of Deposits - less risky than commercial paper and bankers acceptances
Eurodollars
time deposits of US dollars in banks located abroad
Bankers Acceptance
less risky than commercial paper
CAPM Model
ROR = Rf + B*(Rm-Rf)
Long hedges are purchased to protect against price <> and short hedges are sold to protect against price <>
Long hedges are purchased to protect against price increases, and short hedges are sold to protect against price declines
Economic Order Quantity
= square root of ( 2ad/k)
a= fixed cost per PO (ordering costs)
D=periodic demand in units
k=carrying cost per unit
List the assumptions of the EOQ model
Demand is uniform.
Carrying costs are constant.
The same quantity is ordered at each reorder point.
Purchasing costs are unaffected by the quantity ordered.
Sales are perfectly predictable.
Lead time is known with certainty.
Deliveries are consistent.
Adequate inventory is maintained to avoid stockouts.
Cost of carrying safety stock
=expected stockout cost + carrying cost
Reorder formula
average daily demand x lead time in days + safety stock
List the four types of inventory costs
Purchase Costs, order or setup costs, carrying costs and stockout costs
Equation for effective interest rate on loan with compensating balance
Stated rate divided by (1-stated rate-compensating balance %)
Current Market Value Eq
Next divident divided by (Required Rate of Return - Dividend Growth Rate)