After reading and understanding this chapter, perhaps you should be able to:

1. Describe the risk-return trade-off involved in managing a firm’s working capital.
2. Explains the determinants of net working capital.
3. Calculate a firm’s cash conversion cycle and interpret its determinats.
4. Calculate the effective cost of short-term credit.
5. List and describe the basic source of short-term credit.
6. Describe the special problems encountered by multinational firms in managing working capital

Quick Summary For Selected Objectives

• Working capital management involves managing the firm’s liquidity, which in turn involves managing (1) the firm’s investment in current asset and (2) its use of current liabilities.
• The hedging principle, or principle of self-liquidating debt, is a benchmark for working capital decisions.
• The various sources of short-term credit can be categorized into two groups: unsecured and secured.

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After reading and understanding this chapter, perhaps you should be able to:

1. Understand the difference between business risk and financial risk.
2. Use the technique of break-even analysis in a variety of analytical settings.
3. Distinguish among the financial concepts of operating leverage, financial leverage, and combined leverage.
4. Understand the concept of an optimal capital structure.
5. Understand and be able to graph the moderate position on capital structure importance.
6. Incorporate the concepts of agency costs and free cash flow into a discussion on capital structure management.
7. Use the basic tools of capital structure management.

Quick Summary For Selected Objectives

• The objective of capital structure management is to arrange the company’s source of funds so that its common stock price is maximized.
• A break-even analysis permits the financial manager to determine the quantity of output or the level of sales that will result in an EBIT level of zero.
• The optimal capital structure minimizes the firm’s composite cost of capital.

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After reading and understanding this chapter, perhaps you should be able to:

1. Discuss the difficulty encountered in finding profitable projects  in competitive markets and the importance of the search.
2. Determine whether a new project should be accepted or rejected using the payback period, the net present value, the profitability index, and the internal rate of return.
3. Explain how the capital-budgeting decision process changes when a dollar limit is placed on the capital budget.
4. Discuss the problems encountered in project rankings.
5. Explain the importance of ethical consideration in capital-budgeting decisions.
6. Discuss the trends in the use of different capital-budgeting criteria.
7. Explain how foreign markets provide opportunities for finding new capital-budgeting projects.

Quick Summary For Selected Objectives

• The process of capital-budgeting involves decision making with respect to investments in fixed assets. Before a profitable projects can be adopted, it must be identified or found. Unfortunately, coming up with ideas for new products, for ways to improve existing products, or for ways to make existing products more profitable is extremely difficult. In general, the best source of ideas for new, potentially profitable products is within the firm.
• There are four commonly used criteria for determining the acceptance or rejection of capital-budgeting proposals i.e. the payback period, the net present value, profitability index and internal rate of return methods.
• There are several complications related to the capital-budgeting process.
• Ethics and ethical decisions continuously crop up in capital-budgeting.

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After reading and understanding this chapter, perhaps you should be able to:

1. Describe the concept underlying the firm’s cost of capital (technically weighted average cost of capital) and the purpose for its calculation.
2. Calculate the after-tax cost of debt, preferred stock, and common equity.
3. Calculate a firm’s weighted average cost of capital.
4. Describe the procedure used by selected companies to estimate the cost of capital for a multidivisional firm.
5. Use the cost of capital to evaluate new investment opportunities.
6. Calculate equivalent interest rates for different countries.

Quick Summary For Selected Objectives

• This chapter is a combination of an individual cost of funds; i.e. from borrowed and owners into a single cost of capital for the firm as a whole.
• Capital Asset Pricing Model (CAPM) provides a basis for evaluating investor’s required rates of return on common equity, by using three variables – The risk-free rate, stock’s beta coefficient, and market-risk premium.
• The firm’s weighted average cost of capital will reflect the operating or business risk of the firm’s present set of investments and the financial risk attendant upon the way in which those assets are financed.

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After reading and understanding this chapter, perhaps you should be able to:

1. Identify the basic characteristics of preferred stock.
2. Value preferred stock.
3. Identify the basic characteristics of common stock.
4. Value common stock.
5. Calculate a stock’s expected rate of return.

Quick Summary For Selected Objectives

• Preferred stock has no fixed maturity date, and the dividends are fixed in amount.
• Common stock involves ownership in the corporation. In effect, bondholders and preferred stockholders can be viewed as creditors, whereas common stockholders are the owners of the firm.
• The common stockholders are entitled to elect the firm’s board of directors and are, in general, the only security holders given a vote

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