CURRENT ASSETS
MANAGEMENT:
VALUE BASED
WORKING CAPITAL
DECISIONS
2016-03-24
Current assets management: value based working capital decisions
CURRENT ASSETS MANAGEMENT: VALUE BASED WORKING
CAPITAL DECISIONS

E-mail: GRZEGORZ.MICHALSKI@UE.WROC.PL
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www: HTTP://MICHALSKIG.UE.WROC.PL/
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Mobile: 0503452860
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5 lectures + 1 exam (test)
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Next lecture: 20th October.
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T. S. Maness, J. T. Zietlow, „Short-Term Financial Management”.
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N. C. Hill, W. L. Sartoris, Short-term financial management: text and
cases, Prentice Hall, 2004.
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Current assets management: value based working capital decisions
Basic financial aim of the firm
Firm
value maximization:
n
FCFt
Vp  
t
t 1 1  k 
Where: FCFn = free cash flows,
k = cost of capital financing the firm(WACC)
n = period in which FCFn will be generated
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Current assets management: value based working capital decisions
FCF – how to calculate?
k – cost of capital, how to value?
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Current assets management: value based working capital decisions
Cash cycle & Operating Cycle
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Current assets management: value based working capital decisions
Cash cycle & Operating Cycle
 Operating
cycle - the time period from commitment of
cash for purchases until the collection of receivables
resulting from the sale of goods/services.
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Operating cycle = Inventory period + A/cs receivable period
 Cash
cycle - the time period from the actual outlay of
cash for purchases until the collection of receivables.
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Cash cycle = Operating cycle - A/cs payable period
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Current assets management: value based working capital decisions
Example: Cash cycle & Operating Cycle
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The following information has been provided:
— CR = 720
— Inventory = 60
— Accounts receivable = 80
— Accounts payable = 50
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Calculate OKZAP, DSO, OOSZwD, CO, CKG.
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If we know that operating cash will be held on the level of 2 days sale,
how much money will be tied in NWC (Net Working Capital)?
CR
Inventory turnover 
Avg. inventory
360
OKZAP  Inventory period 
Inventory turnover
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Current assets management: value based working capital decisions
How changes in curent assets influence value?
CS: Inventory period = 35 days, Accounts receivable period = 26 days,
accounts payable period = 20 days, Cash Revenues = 1234, T=19%,
calculate:
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Assets, if FA = 800
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Capital Involved
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FCF0, FCF1-n, FCFn
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IRR
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Cost of Capital if D/(D+E) = 40%, kd = 13% & ke = 34%.
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NPV
What will change if IP is shorter? Longer?
What will change if ARP is shorter? Longer?
What will change if APP is shorter? Longer?
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Current assets management: value based working capital decisions
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Current assets management: value based working capital decisions
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Current assets management: value based working capital decisions
Liquid assets level & Firm Value
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Current assets management: value based working capital decisions
Liquidity level & Profitability
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Current assets management: value based working capital decisions
Liquidity level & Value of Liquidity
Where: vi = intrinsic (internal) value of
liquidity,
vm = market value of liquidity,
pp1 = liquidity level (1) for vi > vm
ppopt = optimal liquidity level for vi = vm
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Current assets management: value based working capital decisions
Liquidity level & Value of Liquidity
Where: vi = intrinsic (internal) value of
liquidity,
vm = market value of liquidity,
pp2 = liquidity level (2) for vi < vm
ppopt = optimal liquidity level for vi = vm
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Current assets management: value based working capital decisions