Chapter 31

Principles of Corporate Finance

Eighth Edition

Short-Term Financial Planning

Slides by Matthew Will

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Topics Covered
Links Between Long-Term and Short-Term Financing Decisions Tracing Changes in Cash and Working Capital Cash Budgeting A Short-Term Financing Plan Sources of Short Term Borrowing

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Firms Cumulative Capital Requirement

Dollars A B C Cumulative capital requirement

Year 1

Year 2

Time

Lines A, B, and C show alternative amounts of long-term finance. Strategy A: A permanent cash surplus Strategy B: Short-term lender for part of year and borrower for remainder Strategy C: A permanent short-term borrower
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LA Gear Profit & Assets

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Sales, income and assets of L.A.Gear 1111 (figures in $ millions) - 1111 11 11 11 11 11 11 11 11 11 11 Sales 11 1 11 1 11 1 11 1 11 1 Net income 1 1 1 1 -11 -11 -11 Cash & securities Receivables Inventory Current assets Total assets 1 11 1 11 1 11 1 11 1 1 11 1 11 1 11 1 11 1 1 11 1 11 1 11 1 11 1 1 1 1 1 1 1 11 1 11 1 1 1 1 1 11 1 11 1 11 1

11 11 11 1 -11 1 1 1 1 1 1 11 1 11 1

11 11 11 1 -11 1 1 1 1 1 1 11 1 11 1

11 11 11 1 -11 1 1 1 1 1 1 1 1 11 1

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LA Gear Debt & Equity

Figures in $millions
11 11 1 1 1 1 11 1 11 11 1 1 1 1 11 1 11 11 1 1 1 11 1 11 1 11 11 1 1 11 1 1 1 11 11 1 1 1 11 1 1 1 11 11 1 1 1 11 1 1 1

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Bank debt Long-term debt Preffered stock Common equity

11 11 11 11 1 1 1 1 1 1 11 1 11 1 -11 -11

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Working Capital
Simple Cycle of operations
Cash Raw materials inventory

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Receivables

Finished goods inventory

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Changes in Cash & W.C.

Example - Dynamic Mattress Company
Assets Current As sets Cash Mark Securities Inventory Accts Recv Total Curr Asset s Fixed Assets Gross investment less Depr Net Fixed Assets Total Assets
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11 11 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

11 11 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 11 1

Liabilitie s & Equity Current Liabilitie s Bank Loans Accts Payable Total Curr Liab Long Term Debt Net Worth

11 11 1 1 1 1 1 1 1 1

11 11 1 1 1 1 1 1 1 1 1

Total Liab and owner' s equity 1 1 11 1

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Changes in Cash & W.C.

Example - Dynamic Mattress Company
Income Statement Sales Operating Costs Depreciation EBIT Interest Pretax income .Tax at 11 % Net Income Rs. 111 111 1 11 1 11 11 Rs. 11

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Assume dividend = Rs.1 mil R.E.=Rs.11 mil

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Changes in Cash & W.C.

Example Dynamic Mattress Company
Sources Issued long term debt Reduced inventories Increased accounts payable Cash from operations Net income Depreciation Total Sources Uses Repaid short term bank lo Invested in fixed assets Purchased marketable securities Increased accounts receivable Dividend Total Uses Increase in cash balance Rs. Rs. an 1 11 1 1 1 11 1 Rs. 11 1 11 1 1 1

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Changes in Cash & W.C.

Example - Dynamic Mattress Company Dynamic used cash as follows Paid Rs.1 mil dividend. Repaid Rs.5 mil short term bank loan Invested Rs.14 mil Purchased Rs.5 mil of marketable securities Accounts receivable expanded by Rs.5 mil

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Changes in Cash & W.C.

Example - Dynamic Mattress Company Condensed Balance Sheet
11 11 1 1 1 1 -11 1 1 1 1 1 1 1 1 1 11 11 1 1 1 1 -11 1 1 1 1 1 1 1 1 1 1

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Net working capital Fixed assets: Gross investment Less depreciation Net fixed assets Total net assets Long-term debt Net worth (equity and retained earnings) Long-term liabilities and net worth
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Changes in Cash & W.C.

Example - Dynamic Mattress Company
Condensed Balance Sheet
Sources: Issued long-term debt Cash from operations: Net income Depreciation

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1 1 1 1 1 1

Uses: Invested in fixed assets Dividend

1 1 1 1 1 1

Increase in net working capital

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Cash Budgeting
Steps to preparing a cash budget
Step 1 - Forecast the sources of cash. Step 2 - Forecast uses of cash. Step 3 - Calculate whether the firm is facing a cash shortage or surplus.

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Cash Budgeting
Example - Dynamic Mattress Company Dynamic forecasted sources of cash
Q u a r te r 1 s t1 nd 1 rd 1 th S a le s , R s .m i l 1 1 1 1 1 1 1 11 1 1 11 1 1 1 . . 1 . 1

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AR ending balance = AR beginning balance + sales collections

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Cash Budgeting
Example - Dynamic Mattress Company Dynamic collections on AR
Qtr 1 st 1.1 1 1.1 1 1 nd 1 rd 1 th 1.1 1 1.1 1 1.1 1 1.1 11 1 1.1 11 1.1

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1Beginning receivables . 1Sales . 1Collections .

. Sales in current Qtr ( 11 %) 1111 . 111 . 111 1 .1 . Sales in previous Qtr ( 11 %) 11 . 111 . 111 . 1 1. 1 1 Total collections 1.1 1 1.1 11 1 1.1 11 1.1 1Receivables at end of period . .(111 ) = + -1 Rs.11 Rs.11 Rs.11 Rs.11 .1 .1 .1 .1

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Cash Budgeting
Example - Dynamic Mattress Company Dynamic forecasted uses of cash Payment of accounts payable Labor, administration, and other expenses Capital expenditures Taxes, interest, and dividend payments

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Cash Budgeting
Example - Dynamic Mattress Company Dynamic cash budget
Qtr 1 st Sources of cash collections on AR other Total Sources Uses of cash payment of AP labor and admin expenses capital expenditures taxes, interest, & dividends Total uses of cash Net cash inflow (sources minus uses) 1 nd 1 rd 1 th

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11 . 111 . 1111 . 1111 .1 1 . 11 . 111 . 11 . 1 11 . 111 . 1111 . 1111 .1 11 . 111 . 111 . 111. 1 1.1 1.1 1.1 1.1 1 1 1 1 11 . 11 1 . 11 . 11 . 11 . 11 . 1 .11 .1

111 .111 .111 .111.1 11 .111 . 111 . 111. 1

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Cash Budgeting
Example - Dynamic Mattress Company Dynamic short term financing requirements
Cash at start of period 1 -11 .1 +Net cash flow -11 -11 .1 =Cash at end of period -11 -11 .1 .1 Min operating cash balance 1111 Cumulative short term financing 1.1 1.1 1 1 required (minimum cash balance minus caash at end of period) -11 -11 .1 .1 +11 +11 -11 +1 .1 .1 1.1 1 .1

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A Short Term Financing Plan

Example - Dynamic Mattress Company Dynamic forecasted deferrable expenses

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Quarter 1 1 1 1 st nd rd th Amount Deferrable, Rs.mil 11111111

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A Short Term Financing Plan

Example Dynamic Mattress CompanyFinancing Plan
1 st New borrowing 1Bank loan . 1Stretching payables . 1Total . Repayments 1Bank loan . 1Stetched payables . 1Total . 1Net new borrowing . 1Plus securities sold . 1Less securities bought . 1. Total cash raised 1 Interest payments: 1. Bank loan 1 1. Stretching payables 1 1. Interest on securities sold 1 1. Net interest paid 1 1. Cash required for operations 1 1. Total cash required 1 1.1 1 1 .1 1.1 1 1 .1 1 .1 1 .1 1.1 1 1 .1 1 .1 1.1 1 1 .1 1 .1 1 .1 1 .1 1.1 1 1.1 1 1 nd 1 .1 1.1 1 1.1 1 1 .1 1 .1 1 .1 1.1 1 1 .1 1 .1 1.1 1 1 .1 1 .1 1 .1 1 .1 1.1 1 1.1 1 1 rd 1 .1 1 .1 1 .1 1 .1 1.1 1 1.1 1 -11 .1 1 .1 1 .1 -11 .1 1 .1 1 .1 1 .1 1 .1 -11 .1 -11 .1 1 th

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1 .1 1 .1 1 .1 1.1 1 1 .1 1.1 1 -11 .1 1 .1 1 .1 -11 .1 1 .1 1 .1 1 .1 1 .1 -11 .1 -11 .1

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Sources of Short Term Borrowing

Bank loans Commitment Maturity Rate of interest Syndicated loans Loan sales Security Commercial paper Medium term notes
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Web Resources
Click to access web sites Internet connection required

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www.bankone.com www.bankofamerica.com www.directpayment.org www.nacha.org www.phoenixhecht.com www.gecfosolutions.com

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