Foundations of Financial Management Page 1

Chapter 6

Chapter 6 - Outline
What

LT 6-1

Working Capital and the Financing Decision

is Working Capital Management? Term Structure of Interest Rates U.S. Government Securities Short-Term vs. Long-Term Financing Working Capital Financing Plans

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I. Working Capital Management

6-2

LT

FIGURE 6-1 The nature of asset growth

PPT 6-1

Working

Capital Management is controlling and managing the current assets of a firm Most time-consuming job of a financial manager Crucial to long-term success or failure of a business
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Foundations of Financial Management Page 2

PPT 6-8 FIGURE 6-5 Matching long-term and short-term needs

PPT 6-9 FIGURE 6-6 Using long-term financing for part of short-term needs

II

II

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PPT 6-9 FIGURE 6-7 Using short-term financing for part of long-term needs

III. Term Structure of Interest Rates

LT 6-3
The

II

Term Structure of Interest Rates is also known as the Treasury Yield Curve Graph showing the relationship between S/T and L/T interest rates at different maturities Normal shape is an upward sloping curve, indicating that L/T interest rates are greater than S/T interest rates

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Foundations of Financial Management Page 3

IV. Short-Term vs. Long-Term Financing

Short-term

LT 6-5

TABLE 6-7 Alternative financing plans

IV

PPT 6-11

financing is less expensive but

riskier Long-term financing is more expensive but less risky (or safer) Firm must decide the appropriate mix Similar to the risk-return trade-off
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TABLE 6-8 Impact of financing plans on earnings

IV

PPT 6-11

PPT 6-12

TABLE 6-9 Expected returns under different economic conditions

IV

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Foundations of Financial Management Page 4

PPT 6-12

VI. Working Capital Financing Plans

LT 6-6

TABLE 6-10 Expected returns for high-risk firm

IV

An aggressive (risky) firm:

S/T financing and low liquidity

A conservative (safe or cautious) firm:

L/T financing and high liquidity

A moderate (balanced) firm:

S/T financing and high liquidity OR L/T financing and low liquidity

An appropriate strategy is determined based on the companys tolerance for risk

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PPT 6-13

VI
TABLE 6-11 Asset liquidity and financing assets

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