raise llong term finance Fincioal Intermediatery, ie Banks

investment descision Aggetrate=, indvid sav=small, bank will aggerate loan out high
management of WC Maturity transf=deposit for short term can out anytime, but loans out are for long term
others will replace deposit
WC = Curr ASS- Curr LIB Diversification of Risk=bank lend to many companies, reduce risk of defalut

Man Acc= short Term desc ie Banks, Pensions Funds, Investment Trust, Unit Trusts, State Saving
implement long term strategy, ste up
controll system
mesaure performance Final Deposit= Initial dep X 1/Liquid Ratio
ie 10,000 x 1/0.1 = 100,000> 100,000- 10,000 = 90,000 credit created
Fin Acc= report to stakeholders
how company historical perf
legal requir Capital Market = LSE, AIM, Eurobond
>>long term capitalm in form of equity capital, ord+pref shares or loan cap or debentures
Starategy= course of action taken for 5+years loans
to achieve and objective Money markets=discount mkt, inter-nbank mkt, certf of deposit, local gov mkt, inter comp
short term>> =+ euro currency mkt etween banks
objective=bee profitable, max wealth ie bank loan, over draft
maxmising= find best solution,
satisfying= simple adequate sol Stock Exchnge= fair orderly effiectn mkt, for trf of sequrities, and raising of new capital
strict regulations, all revelant made public, all investors deal on sam eterms and prices
int Stake= Emp, managers
Connected= sharehold, debt lenders bid-offer spread= profit for broker
customer, supplier, bank valued by market forces, buyers and sellers,
Ext= gov, local comm, speculations = reduces fluctuins in market prices, as price falls,
more speulators will buy >stop falling futher.
not fpr profit= maitan happy employee, Bull + increas, Bear= decrease
show respect ofr enviro i insures theres a ready market of buyers and sellers
good service, ie NHS
bebefit=intangible, ie better helath
>>value for money=objectibve Efficeint Market Hypothesis
max benefit least cost responds to information availabel, quickly reflects comps fin posiotn.

Value for Maney VfM Intrest rates

Economy>tender, benchmarking
Effectiveness>good results, ie deaths per 1k paitents
Efficenecy>make good use of resources
ie, paitents per nurse
Yeild Curves
yeild of sequrity varies with lentgh of time
before it matures= term structurs of int rates
general level of uint in economy
levels of risk
high risk>hjigh returns. Diiferent for didd people, ie bank=low risk
duration of loan
assume in liongterm int rates = stable> higher the int rate, as risk to defult
intermediate need for profit
deposit = low, loan = high> diff = profit
size
if larege money lent/borrowed > save on admin

yeild expectation theory=if int inc in future > = this curve. Would invert if int rates decrase
% liquid pref theory= yeilds must rise as term to mat inc, ie longer they invest, more thy need
Segmentattion theory =diff inves intrested in diff segmetn sof curve, short term yeilds are
yrs to maturity for banks, shape -= reflection of attiudes of diff investors, when two sectors meet,
disturbance n continuty of graph
Liquid ratio
Working Capital Current Ratio= curr Ass / curr lib expect >1
net current ass
= reciables+cash+inventory - payables Liquid ratio
Quick Ratio= cur Ass - invent / cur lib lower or = to CR
invest in WC does not direclt make profits.
inves in Fixed Ass does. Effiency ratio
invent turnover = cog sold pa / avg invent
short term fuinance= overdraft, or delay pay to payables.
cheaper, but int rates may be high, or delay payables reciables tovr = credit sales pa / avg recivale
might lead to loss of discounts.
risky as repayable on demand payables tovr = cred purchase pa / avg payables

permanaent WC = long term> finance by long term

tempory WC= finance by short term cons of ratio=
use sofp, as one point in time, not seasonal
window dressing
past not future
must use in comparison
 Operating Cycle
time between pay for materials into invent and recipt of sales
days
Reciable Days = Avg rec/ credit sales x 356 days x avgrage = just the figures that are given
Invent days
Finished goods = avg fin goods / cos x 356 days x
WIP = avg WIP / cost of prod' x 356 days x Over capitliz = wc = too high > reduce wc by
Raw mat = avg raw mat/ raw mat purchase x 365 days x better managemer reciables, cash, invt
>> needs less financing and can invest these
Less Over trading = wc = too low,
payable days = avg payable/ credit purchs x 365 days (x)

net operat cycle x

EOQ REC + PAYbles collections

credit chk set clear defince procedures
invt cost= Purchase cost, re-order cost, Hold Cost check credit rating agencies set timing of issue letter/demands
trade bank ref makes chase telephjone
Average stock = 1/2 Order Quantaty
analyse payment of exist stop deliveries
asses fin statements use of agencies
review credits limite regularly cost of legal action?

credit terms chg Intrest

vary by compettion and customs
C= fixed cost per order quantify cost of settlemnet discount
D - annual demand ensure customers aware of discounts
Ch = Cost of holding per unit per annum, by puttinf on inv, statements
enforce discount policy
Uk. Late Payment Act, small company
can chq 8% abive base rate if late
more than 30days

Just in Time Invoicing Discounting

minimum invnt kept for fin goods, wip and raw mat
Fin Goods = short product periodm demand pull production
good fprecasting for demand
good quality produuction
WIP = short production period, if fster>wip lower
flexbility of workforeceto expand contract on short notice
Raw Mat =receive from suppliers>quick deleivery
good quality iof raw mat, no hhold ups
flexible of suppliers to deliver quickly
tight contracts with suppliers with penealty clause
sell inv to 3rd party, ie bank for lower amount. Supplier gets cash immeadetly.
Factoring
pay another company to admin all or part of sales ledger
different falicites avialbel
basic= pay factor to handle admin, maintain slaes ledger, and collect debt
higher fee= advance 80% of value immeadetly
higher fee= factor responsible for bad debts, = non recourse factoring
normal factoring= with recourse factoring
if offer 4% discount if pay in 1 month, and customers nomally take 3mnths

whole philosophy of bhusinnes, cost saving of lowere invt, 4 x 12 x 100% = =25%

less risk of obselence, better quality, efficent, less wastage 96 2

supplier offers 2% discount if pay in 10days instead

of 30 days

2/98 x 100% over 20 days (10-30)

2/98 x365/20 x100% = 37%pa

=cost of not taking discount

Reason for holdign Cash Cash Surpluses CASH BUDGETS
Transaction motive short term
Precutonary motive reduce overdraft
Speculative motive invest short term tresaury stock
invest in bank deposit
Cash Shortages blue chip share
Reduce stock long term
def capital expend new project
defer or reduce divididns acquisitions
chase debtors to pay quick inc divid
delay payment to creditor buy back share
Get overdraft repay longterm loan
sell surplase asstes
sale and leaseback

Bulmol Modle
for optimum amount of cash to be trf each time from investments
to hard cash

Eco quant of cash = 2 x Annual csh required x cost of orderin csh

net intrest cost of hold csh

net intrest = invest int - bank int

Miller Orr modle

more realistic
cash flows likely ot flactulate from day to day
fix limits of upper and lower

safety lvl or lower lvl is set

statistic calculat erange
upper limit fixed
cash flow managed so falls within range

return point = lower +(1/3 spread)

spread=3(3/4 trans cost x variance of csh flow)^1/3

Int rate

min bal need = 10,000

trans cost = 5 /trans
standard devation = 2000 per day
int rate = 5.11 pa 0.014% per day
Discounted Cash Flow
cost = 45000
assume - cash flow arise at end of year Cf= 8000 / yr
Int = 15%
NPV = ?

what PV of 18k for 5yr to infinty? At 5%

Perputity = 1/r yr DF
r = rate of intrest 1-4 3.546
1-infinity 20
IRR = rate at which NPV = 0 16.45

IRR = a+ NPVa (b-a) % 5 to infinity 16.45 18000 x 16.454 = 296,172

NPVa-NPVb

Accounting Rate of Return compare to target rate of return ie ROCE

a = lower rate
b = higher rate avg profits pa from invest x 100% Payback Period
NPVa = NPV of a avg book value of invest no of years to recoup initial invstment
NPBb = NPV of b quicker the better

total profit (less depn) = avg annual profits

IF NPV = positive >> second rate = bigger years of project
if NPV = negative >> second rate = lesser
invest + scrap value = avg book value
2
Annuty = same cash flow every years >> payback = between 2-3 yrs
>>discount is cumalative or 2.75 if profits = evenly

cost 10k cost 10k

Relevant Cost CF yr1 =5k, CF yr1 =5k, yr 2 = 7k
yr 2 = 7k scrap = 6k
yes= future, incremental or extra CF. scrap = 6k wc= 1k at start
wc= 1k at start CT =30%
No= sunk, historical, depn, book val CT =30% Cap allow =25% on reducing
No=int cost, dealt with by discountin Cap allow =25% on reducing Cost of Cap = 10%
reducing bal
Direct and oppurnity cost/revenues Cost of Cap = 10%

Working Capital
released at end of project

TAXAtion this way is better >>>>>>>

tax on operationg cash flow

no advance tax
no tax on WC
no pool of cap allowance
calculate seperately
noCGT

Cap allow on full cost

not the cost - scrap

Inflation
instead of having to I nflate each cash flow using inflation t
and then discounting wasch at cost of capital
do instead discount at effective cost of capital
page 52