Chapter 6
Working Capital and the
Financing Decision
FIGURE 6-1
The nature of
asset growth
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PPT 6-1
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PPT 6-2
TABLE 6-1
Yawakuzi sales forecast
(in units)
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PPT 6-3
TABLE 6-2
Yawakuzi’s production
schedule and inventory
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TABLE 6-3
Sales forecast, cash receipts and payments,
and cash budget
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PPT 6-4
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PPT 6-5
TABLE 6-4
Total current assets,
first year ($millions)
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PPT 6-6
TABLE 6-5
Cash budget and assets for second year
with no growth in sales ($millions)
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FIGURE 6-4
The nature of asset
growth (Yawakuzi)
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PPT 6-7
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PPT 6-8
FIGURE 6-5
Matching long-term
and short-term needs
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PPT 6-9
FIGURE 6-6
Using long-term financing
for part of short-term needs
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PPT 6-9
FIGURE 6-7
Using short-term financing
for part of long-term needs
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FIGURE 6-10
Long- and short-term
monthly interest rates
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PPT 6-10
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TABLE 6-7
Alternative
financing plans
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PPT 6-11
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TABLE 6-8
Impact of financing
plans on earnings
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PPT 6-11
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PPT 6-12
TABLE 6-9
Expected returns under
different economic conditions
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PPT 6-12
TABLE 6-10
Expected returns for
high-risk firm
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PPT 6-13
TABLE 6-11
Asset liquidity and financing assets
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Chapter 6 - Outline
LT 6-1
 What
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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Working Capital Management
LT 6-2
 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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Term Structure of Interest Rates
LT 6-3
 The
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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U.S. Government Securities
LT 6-4
Treasury Bills (T-Bills) = short-term IOUs
3 months to 1 year in maturity
Treasure Notes = intermediate term
1 to 10 years in maturity
Treasury Bonds = long term
10 to 40 years in maturity
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Short-Term vs. Long-Term
Financing
 Short-term
LT 6-5
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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Working Capital Financing Plans

LT 6-6
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
– L/T financing and low liquidity

OR
An appropriate strategy is determined based on the
company’s tolerance for risk
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