WORKING

CAPITAL MANAGEMENT

1. Operating Cycle

2. Cash Conversion Cycle

or

Inventory Turnover = COGS / (Beginning Inventory + Ending Inventory)/2
Inventory Period =365 days / Inventory Turnover

Receivables Turnover = Net Sales / (Beginning Receivables + Ending Receivables)/2
Receivables Period=365 days / Receivables Turnover

Payables Turnover = COGS/(Beg. Accounts Payable + End. Accounts Payable)/2
Payable Deferral Period =365 days / Accounts Payable Turnover

3. DuPont ROE



4. Accounts Receivable Management

Profit Contribution

Add/Deduct: Cost of Marginal A/R
Add/Deduct: Effect on Bad Debts
Cost of Cash Discount

Net Effect on Profit

XXX
XXX
XXX
XXX
XXX

5. Inventory Management

*You need to memorize EOQ, Reorder point, and Safety Stock

6. Payables Management

LEASING

Decision Factors LESSOR:

1. Purchase price of the asset
2. Costs other than maintenance expense
3. Maintenance expense (depends whether the case is OPERATING or FINANCIAL
LEASE)
4. Tax shield on costs (Maintenance and/or other costs x Tax Rate)
5. Tax shield on depreciation expense (Depreciation expense x Tax Rate)
6. Before-tax break-even point of periodic lease payment to be charged to the
lessee

Decision Factors LESSEE:

1. Purchase price of the asset
2. Loss on depreciation tax shield
3. Lease payments
4. Tax shield on lease payments
5. NPV of the lease, using after-tax cost of debt.

Present Value Formula:

Present Value of an Annuity Due Formula:

Cost of Debt Formula:

Interest Rate (1 Tax Rate)

UNDERSTANDING OPTIONS

VALUING OPTIONS

Go as far as you can see. When you get there,

you will be able to see farther.