Handout Manajemen Keuangan

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Handout Manajemen Keuangan

• Working Capital Management

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Working capital terminology

• Gross working capital total current assets.
• Net working capital current assets minus
  non-interest 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 SKIs working capital policy compare
with its industry?

• 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?

• 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

• Short-Term Investment
• Cash Management
• Account Receivable Management
• Inventory Management
• Short-Term Financing
• 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
• Cost 1 Cost 2
• __________________________________________________
  _________________________________
• Short-Term Assets
• Cash and Marketable Opportunity
  cost Illiquidity and solvency
• Securities of funds costs
• Accounts receivable Cost of investment
  Opportunity cost of lost
  in accounts sales due to overly
  receivable and restrictive
  credit policy bad debts and/or terms
• Inventory Carrying costs of
  Order and setup costs
• 
  inventory, including associated
  with replenishment
• financing, and production
  of finished
• warehousing cost, goods
• etc.

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Working capital financing policies

• 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
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Accrued liabilities

• Continually recurring short-term liabilities,
  such as accrued wages or taxes.
• Is there a cost to accrued liabilities?
• 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?

• Trade credit is credit furnished by a firms
  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

• 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

• Firm buys goods worth 506,985. Thats the cash
  price.
• They must pay 5,121 more if they dont 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

• Payables level, if the firm takes discounts
• Payables 1,389 (10) 13,890
• Payables level, if the firm takes no discounts
• 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

• 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
• 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
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Effective cost of trade credit

• Periodic rate 0.01 / 0.99 1.01
• Periods/year 365 / (40-10) 12.1667
• Effective cost of trade credit
• EAR (1 periodic rate)n 1
• (1.0101)12.1667 1 13.01

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Bank Loans

• 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

• Solutions
• 1. Effective rate of interest 18.
• 2. Effective rate of interest
• 32,000/(200,000-40,000) 20.
• 3. Effective rate of interest
• 28,000/(200,000-40,000-28,000)
• 21.21

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Commercial paper (CP)

• Short-term notes issued by large, strong
  companies. BB couldnt issue CP--its 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

• 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

• 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

• 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

• Solutions
• a. 1. Line of credit
• Commitment fee
• (0.005)(2,000,000)(335/365)
• 9,178
• Interest
• (0.11)(30/365)(2,000,000)
• 18,082
• Total 27,260

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Alternative Financing Example

• Solutions
• 2. Trade discount
• a. 0.2483 24.83.
• Total cost 0.2483(2,000,000)(30/365)
• 40,816.
•  
• 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

• Solutions
• 3.30-day commercial paper
• Interest (0.095)(2,000,000)(30/365)
• 15,616
• Transaction fee (0.005)(2,000,000)
• 10,000
• Total 25,616

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Alternative Financing Example

• Solutions
• 4.60-day commercial paper
• Interest (0.09)(2,000,000)(60/365)
  29,589
• Transaction fee (0.005)(2,000,000)
  10,000
• Total Costs 39,589
• Marketable securities interest received
• (0.094)(2,000,000)(30/365) 15,452
• Transactions cost, marketable securities
• (0.004)(2,000,000) 8,000
• Total 32,137
•  
• The 30-day commercial paper has the lowest cost.