Assets cash equivalents

Assets are classified as current, fixed, or intangibles. Current assets include cash, cash equivalents, marketable securities, accounts receivable, inventories, and prepaid expenses. Cash and cash equivalents are those items that can be easily converted to cash. Marketable securities are securities that a company holds that also may be converted to cash. Accounts receivable are the amounts due a company from customers from material that has been delivered but has not been collected as yet. Customers are given 30, 60, or 90 days in which to pay however, some customers fail to pay bills on time or may not be able to pay at all. An allowance is made for doubtful accounts. The amount is deducted from the accounts receivables. Inventories include the cost of raw materials, goods in process, and product on hand. Prepaid expenses include insurance premiums paid, charges for leased equipment, and charges for advertising that are paid prior to the receipt of the benefit from these items. The sum of all the above items is the total current assets. The term current refers to the fact that these assets are easily converted within a year, or more hkely in a shorter time, say, 90 days. 

As shown in Table 16.3, assets for this corporation are divided into Current Assets, Investments, Property, and Other Assets. Current assets are items of economic value that could be converted to cash in less than one year, including cash and cash equivalents, marketable securities, accounts receivable, inventories, prepaid expenses, and deferred income taxes. The current assets total 4,630,000,000. Investments pertain to investments in companies in which ownership interest by U.S. Chemicals is 50% or less, but where U.S. Chemicals exercises significant influence over operating and financial policies. Property constitutes fixed assets, including land, buildings, machineiyr, equipment, and software, and is listed at its bod... 

The initial cost of the asset is shown as a fixed asset in the balance sheet. In the profit/loss account, the decrease in value is shown each year by allowing a proportion of the original value as a notional operating cost, the depreciation allowance . A correspondingly reduced asset value is then shown in the end-of-year balance sheet, with an equivalent increase in the cash assets (so that the total assets are not changed). 

Income-tax laws permit recovery of funds by two accelerated depreciation schedules as well as by straight-line methods. Since cash-flow timing is affected, choice of depreciation method affects profitability significantly. Depending on the ratio of depreciable to nondepreciable assets involved, two projects which look equivalent before taxes, or rank in one order, may rank entirely differently when considered after taxes. Though cash costs and sales values may be equal on two projects, their reported net incomes for tax purposes may be different, and one will show a greater net profit than the other. 

The zero-coupon curve is used in the asset-swap analysis, in which the curve is derived from the swap curve. Then, the asset-swap spread is the spread that allows us to receive the equivalence between the present value of cash flows and the current market price of the bond. 

The current ratio is defined as current assets divided by current liabilities. It is an indication of the ability of a company to meet short-term debt obligations. The higher the current ratio, the more liquid the company is. However, too high a ratio may indicate that the company is not putting its cash or equivalent cash to good use. A reasonable ratio is two, but it is better to compare current ratios of companies in a similar business. From Table 16.3, the current assets ratio of U.S. Chemicals is 4,630/4,153 = 1.11, which is alow value. At the end of the year 2000, Monsanto Company had a much better current ratio of 1.80. 

SPV usually enters into an interest rate swap. The swap counterparty may also sell the SPV other derivative instruments, such as interest rate caps, to manage possible cash flow risk. Such risk-exposure management requires careful attention, since the SPV s risk profile can have a significant impact on the credit risk of the notes issued to investors. In an unleveraged transaction, the size of the issue is equivalent to the credit protection the SPV offers on the reference pool of assets. For example, if the credit default swap is on a nominal of 300,000, the nominal value of the notes issued will be 300,000. 

Capital recovery costs The equivalent expense to recover the cost of an investment, like that for fixed assets and working capital. The calculation normally uses asset life, salvage value, and the cost of capital to make the conversion. Also called equivalent uniform annual cash flow. ... 

The economic comparison is based on the equivalent annual cost (EAC). The EAC is the cost per year of owning and operating an asset over its entire lifespan. EAC is often used as a decision-making tool in capital budgeting when comparing investment projects. The EAC can be calculated by multiplying the net present value (NPV) of a project by the loan repayment factor LRF. The loan repayment factor (LRF) is calculated by the total time n (years) of the project and the discount rate ( ). The net present value (NPV) of a project or investment is defined as the sum of the present values of the annual cash flows C, minus the initial investment Cq. 

The I-spread is sometimes used to compare a cash bond with its equivalent CDS price, but for straightforward relative value analysis is usually dropped in favor of the asset-swap spread, which we look at later in this section. 

---