Principles Used in Chapter 16. Principle 1 : The Risk-Return Trade-Off – We Won’t Take On Additional Risk Unless We Expect to Be Compensated with Additional Return. Cash Flow Process. Two typical sources of cash: external and internal
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Refers to the ability to transform a security into cash.
Should an unforeseen event require that a significant amount of cash be immediately available, then a sizable portion of the portfolio might have to be sold. Manager should prefer securities that can be sold at or near its prevailing market price.
Legal contracts that involve the actual sale of securities by a borrower to the lender, with a commitment on the part of the borrower to repurchase the securities at the contract price plus a stated interest charge.
The probability of default increases with the age of the account. Thus, eliminating past-due receivables is key. One common way of evaluating the situation is with ratio analysis – average collection period, ratio of receivables to assets, ratio of credit sales to receivables, ratio of bad debt to sales.
A direct trade-off exists between collection expenses and lost goodwill on one hand and noncollection of accounts on the other.
Involves the control of the assets that are produced to be sold in the normal course of the firm’s operations.
The purpose of carrying inventory is to uncouple the operations of the firm – that is, to make each function of the business independent of each other function – so that delays or shutdowns in one area do not affect the production and sale of the final product.