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Copy of Negotiation Project
Transcript of Copy of Negotiation Project
Duong Huong Giang
Hoang Tuyet Mai
Hua Hoang Hai Connecticut Valley School Negotiation B. How can we distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current assets because it is inefficient? Does SKI’s working capital policy seem appropriate? A. Does SKI seem to be following a relaxed, moderate, or restricted working capital policy? J. Barnes knows that SKI sells on the same credit terms as other firms in its industry. Use the ratios presented in Table IC16-1 to explain whether SKI’s customers pay more or less promptly than those of its competitors. If there are differences, does that suggest that SKI should tighten or loosen its credit policy? What four variables make up a firm’s credit policy, and in what direction should each be changed by SKI? m. Assume that SKI buys on terms of 1/10, net 30, but that it can get away with paying on the 40th day if it chooses not to take discounts. Also, assume that it purchases $3 million of components per year, net of discounts. How much free trade credit can the company get, how much costly trade credit can it get, and what is the percentage cost of the costly credit? Should SKI take discounts? Company's Introduction Company's Working Capital Management Dan Barnes, financial manager of Ski Equipment Inc. (SKI)
The company’s founder sold his 51% controlling block of stock to Kent Koren
EVA = EBIT(1 - T) - Capital costs = EBIT(1-T) - WACC(Capital employed)
SKI’s designs of skis, boots, clothing are acclaimed throughout the industry
Costs are too high, prices are too low Evaluation two aspect : Inventory and Account Receivable
To avoid the costs of “running short,” and to serve to customers
To maintain good relationships with its customers
Be able to offset the costs of carrying (high prices or higher sales)
ROE should be no lower than that of firms with other working capital policies
Not as profitable as the average firm in its industry
Excessive working capital
Reduce its working capital The company may have the optimal amounts of cash, securities, receivables, and inventories
Too much or too little of these items
Problems: The production manager, the marketing manager, the sales staff, the treasurer
lower inventories - less capital - the dollar cost of capital decline - EVA increase
lower raw materials inventories - production slowdowns - higher costs
lower finished goods inventories - the loss of profitable sales
The same with regard to cash and receivables Questions Carrying a lot of inventory per dollar of sales compare with industry
Keep larger amount of receivable than receivable average industry
Keep large amount of cash
--> Relaxed Policy There are three alternative current asset financing policies: aggressive, moderate, and relaxed Of course exact maturity matching is not possible because of:
The uncertainty of asset lives
Some common equity must be used and common equity has no maturity An aggressive financing policy
A conservative financing policy => If SKI can obtain financing from its bank (or from other sources) at an interest rate of less than 13.01 percent, it should borrow the funds and take discounts. SKI’s days’ sales outstanding (DSO) of 45.63 days is well above the industry average (32 days). SKI’s customers are paying less promptly. So, SKI should consider tightening its credit policy to reduce its DSO.
Cash Discounts: Lowers price. Attracts new customers and reduces DSO.
Credit Period: How long to pay? Shorter period reduces DSO and average A/R, but it may discourage sales.
Credit Standards: Tighter standards reduce bad debt losses, but may reduce sales. Fewer bad debts reduces DSO.
Collection Policy: Tougher policy will reduce DSO, but may damage customer relationships. The four variables that make up a firm’s credit policy are: