Introduction to Corporate Finance

ONLINE CHAPTERS

FIGURE 18.2 TRADE-OFF OF SHORT-TERM FINANCIAL COSTS

Cost ($)

Optimum balance

Account balance ($)

*Cost 1 **Cost 2

Operating assets

Cash and marketable Opportunity cost of Illiquidity and

securities funds and tax costs solvency costs

Inventory Carrying cost of Order and setup costs

inventory, including associated with

financing, warehousing, replenishment and

obsolescence costs, etc. production of

finished goods

Accounts receivable Cost of investment in Opportunity cost of

accounts receivable and lost sales due to overly

bad debts restrictive credit policy

and/or terms

Short-term financing

Accounts payable, Cost of reduced liquidity Financing costs resulting

accruals, and notes caused by increasing from the use of less

payable current liabilities expensive short-term

financing rather than

more expensive long-

term debt and equity

financing

Effect of an increase in account balance

Total cost (cost 1 + cost 2)

Cost 1*

Cost 2**

See the problem and

solution explained step by

step on the Coursemate

website.

SMART
CONCEPTS