Assignment Review Lecture 7

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Assignment ReviewLecture 7

• Current Asset Mgmnt Financing
• Analyzing Financial Performance
• (Gapenski Chapters 16 17)

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The costs of assets

• All assets have costs
• Assets are financed by equity and liability the
  fundamental accounting equation
• The concept of an opportunity cost
• Fixed assets
• Acquisition funded by loans or equity
• But also incur a carrying cost time value
  effect also funded by loans or equity

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Current asset (CA) costs

• CA are also financed by equity/ liability
• Cash and marketable securities
• Accounts receivable
• Inventories
• Difference between earning (marketable
  securities) and unearning (A/R, inventories) CA.
• A/R can be factored
• Inventories can be sold at discount

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Optimizing CA

• Rule is to keep CA to minimum possible without
  incurring gt costs
• A/R depends on trade credit offered affected by
  customer demands and industry practice.
• Inventory levels affected by
• Operating levels (e.g. process industries vs.
  hospitals) are permanent CA
• Safety stocks and seasonal stock are
  temporary current assets

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Financing CA policies

• Maturity matching moderate
• Permanent assets with equity and LT debt
• Seasonal assets with ST debt
• Conservative equity and LT debt funds permanent
  assets and part of seasonal assets
• Aggressive ST borrowings fund seasonal and part
  of permanent assets
• Why would you select each?

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Cash management

• Collect quickly/ disburse (pay) slowly
• Collection variety of methods get collections
  into cash, thence into earning assets lockbox
  services, concentration banks, electronic funds
  transfer and automated clearinghouses
• Disbursement payables management, ZBAs at
  concentration banks, remote disbursement

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Receivables management

• Cost of carrying A/R is a function of
• average collection period (ACP) aka Days Sales
  Outsanding (DSO)
• average sales/day
• cost of financing
• ACP depends on credit terms offered/ nature of
  the business
• Reducing ACP generates a reduction in carrying
  cost and a one-time infusion of cash
• Aging schedules can point to problems
• HC providers face complexities other sectors do
  not

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Sources of short term financing

• Accrued expenses
• free money
• Spontaneous
• Accounts payable
• Free trade credit pay w/in discount period
• Costly trade credit pay outside time
• Ethical issues with paying late and taking
  discount or with stretching
• Bank financing short term loans, revolving
  credits, etc.

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Analyzing financial performance(Chapter 17)

• Statement of cash flows How was cash generated?
• Operating activities core to business
• Investing activities generally, purchases/
  sales of fixed assets
• Financing ST / LT securities as investments and
  as liabilities

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Ratio analysis

• Common approaches, but values are
  industry-specific
• Net income as numerator
• Total margin -- NI/ revenues
• ROA -- NI/ total assets
• ROE -- NI/ equity
• Would you expect the ROA to be higher/ lower than
  the ROE? Why?

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Liquidity ratios

• Current ratio CA/ CL
• Acid test remove inventories from CA
• Some industries function with relatively high
  inventories
• Days cash on hand can a business meet its
  paymentsan operational view

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Debt Management Ratios

• Capitalization ratios balance sheet data
  focusing on debt leverage
• Debt/ equity
• Debt/ assets
• Coverage ratios income statement data
  indicating whether net income can cover debt
  requirements
• TIE ratio (times interest earned) EBIT/
  Interest exp
• Complementary, but capitalization ratios are
  point in time

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DuPont Analysis

• ROE Total margin x Total asset turnover x
  Equity multiplier
• NI/ Equity NI/ Rev x Rev/ assets x Assets/
  equity
• Total margin expense control
• Total asset turnover asset utilizationEquity
  multiplier debt utilization