Financial Management
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 DiscussionQuestions............................................ 278 Practice Problem ............................................... 279 MultipleChoiceQuestions ....................................... 281 CHAPTER 9 Working Capital Management—Part 1 (Working Capital Policies and Managing Current Assets) 285 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 What Is Working Capital Management? . . . . . . . . . . . . . . . . . . . . . . . . . . 286 Objectives of Working Capital Management . . . . . . . . . . . . . . . . . . . . 287 Importance of Working Capital Management . . . . . . . . . . . . . . . . . . . 287 Advantages of Maintaining Working Capital. . . . . . . . . . . . . . . . . . . . . 288 Disadvantages of Keeping Excessive orRedundantWorkingCapital................................ 288 Current Asset Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 Relaxed(Liberal)InvestmentPolicy............................ 289 Restricted (Tight or “Lean and Mean”) Investment Policy. . . . . . . . . . 290 Moderate (Balanced) Investment Policy . . . . . . . . . . . . . . . . . . . . . . . . 290 Implications ............................................... 290 CurrentAssetFinancingPolicies................................. 290 ConservativeFinancingPolicy ................................ 291 Aggressive Financing Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 Maturity Matching Financing Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 293 Implications ............................................... 294 IllustrativeProblems.......................................... 294 Problem #1: Working Capital Policy (CurrentAssetInvestmentPolicy)............................. 294 Problem #2: Working Capital Policy (Current Asset Financing Policy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 Managing Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 Cash and Marketable Securities Management . . . . . . . . . . . . . . . . . . . 296 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 DiscussionQuestions............................................ 319 Practice Problem ............................................... 319 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 CHAPTER 10 Working Capital Management—Part 2 (Financing Current Assets) 327 Intended Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 Current Asset Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 SourcesofShort-TermFinancing.............................. 329 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 DiscussionQuestions............................................ 339 Practice Problem ............................................... 339 Multiple Choice Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
FIGURES
Figure 1.1: Key Areas of Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 2.1: Three and Five-Factor DuPont . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Figure 2.2: Five-Factor DuPont with Interest Expense. . . . . . . . . . . . . . . . . 59 Figure 2.3: Gross Profit Variance Analysis Model. . . . . . . . . . . . . . . . . . . . . 72 Figure 2.4: Change in Price and Quantity Model . . . . . . . . . . . . . . . . . . . . . 75 Figure 2.5: Full Sales Variance Analytical Model . . . . . . . . . . . . . . . . . . . . . 76 Figure4.1: PhilippineYieldCurve................................. 128 Figure 4.2: Beta Calculations of Cebu Air, Inc. . . . . . . . . . . . . . . . . . . . . . . . 129 Figure 4.3: Additional Beta Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Figure 4.4: NewCo’s Marginal Cost of Capital . . . . . . . . . . . . . . . . . . . . . . . 147 Figure 5.1: Actual vs. Interpolated IRR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 Figure5.2: NPVProfileofProjectX................................ 197 Figure 5.3: NPV Profile Comparisons, Projects X and Y . . . . . . . . . . . . . . . . 198 Figure5.4: NPVProfile,No-IRRProject............................. 201 Figure5.5: NPVProfile,Two-IRRProject............................ 201 Figure 5.6: Preferred Capital Budgeting Techniques . . . . . . . . . . . . . . . . . . 208 Figure 6.1: Risk-Return for Various Security Classes . . . . . . . . . . . . . . . . . . 225 Figure 6.2: Contribution Margin Income Statement . . . . . . . . . . . . . . . . . . 226 Figure 6.3: Break-Even Point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 Figure 7.1: Characteristics of Hybrid Securities Compared to Equity and Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 245 Figure 7.2: Common Types of Hybrid Securities. . . . . . . . . . . . . . . . . . . . . . 245 Figure 8.1: Effect on Stock Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 Figure8.2: EffectonCostofEquity................................ 266 Figure 8.3: Effect on Stock Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Figure 8.4: Stock Prices following Dividends and Repurchases (January31,2011=100)............................... 273 Figure 8.5: Illustration of Stock Splits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 Figure 9.1: Current Asset Investment Policies and Current Asset Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 Figure 9.2: Conservative Financing Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . 291 Figure 9.3: Aggressive Financing Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 Figure 9.4: Maturity Matching Financing Policy . . . . . . . . . . . . . . . . . . . . . . 293 Figure9.5: CashConversionCycle(CCC)............................ 297 Figure9.6: OperatingCycle(OC).................................. 298 Figure 9.7: Cash Break-Even Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 Figure 9.8: Baumol Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Figure9.9: EOQModel.......................................... 316
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Glossary ...................................................... 345 Bibliography ................................................... 370 Index ......................................................... 376
2025 Higher Education Learning Solutions for the Business and Accountancy Program 50
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