X. Working Capital Finance (Student).doc

X. Working Capital Finance MAS Review, 2nd Semester, SY20!"20# $%$ & College o' Acco(ntanc) Fe*r(ar) +, 20# THEORY

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Compared Compared to oter 'irms 'irms in te ind(str) ind(str),, a compan) tat tat maintains maintains a conservative conservative workin working g capital polic) polic) will will tend to ave a a. -reate -reaterr percen percentag tage e o' sor sort"t t"term erm 'ina 'inanci ncing. ng. *. -reater -reater risk risk o' o' needing needing to sell sell c(rren c(rrentt assets assets to to repa) repa) de*t. de*t. c. iger iger ratio ratio o' c(rren c(rrentt asse assets ts to 'i/ed 'i/ed asse assets. ts. d. ig iger er tota totall ass asset et t(r t(rno nove ver. r.

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A 'irm 'ollow 'ollowing ing an aggressiv aggressive e working working capital capital strateg strateg) ) wo(ld wo(ld a. old old s(*st s(*stant antial ial amo(nt amo(nt o' 'i/e 'i/ed d asset assets. s. *. Minimi Minimie e te te amo( amo(nt nt o' o' sort sort"te "term rm *orr *orrowi owing. ng. c. Financ Finance e 'l(ct(a 'l(ct(atin ting g assets assets wit wit long"t long"term erm 'inan 'inancin cing. g. d. Minimi Minimie e te te amo(nt amo(nt o' '(nd '(nds s eld eld in ver) ver) li1(id li1(id ass assets ets..

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e working capital 'inancing polic) tat s(*3ects te te 'irm to te greatest greatest risk o' o' *eing (na*le to meet te 'irm4s mat(ring o*ligations is te polic) tat 'inances a. Fl(ct( Fl(ct(ati ating ng c(rre c(rrent nt asset assets s wit wit long"t long"term erm de*t de*t.. *. $erman $ermanent ent c(rr c(rrent ent asse assets ts wit wit long long"ter "term m de*t. de*t. c. $erman $ermanent ent c(rr c(rrent ent asse assets ts wit wit sor sort"t t"term erm de*t de*t.. d. Fl(ct( Fl(ct(ati ating ng c(rre c(rrent nt asset assets s wit wit sort" sort"ter term m de*t. de*t.

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6etermining te appropriate appropriate level o' working working capital capital 'or a 'irm re1(ires a. 7val(ating 7val(ating te te risks associate associated d wit vario(s vario(s levels levels o' 'i/ed assets assets and te te t)pes o' de*t (sed (sed to 'inance 'inance tese assets. assets. *. Canging Canging te te capital capital str(ct(re str(ct(re and and dividend dividend polic) polic) 'or te 'irm. 'irm. c. Maintaining Maintaining sort"t sort"term erm de*t at te lowest lowest possi*le possi*le level level *eca(se *eca(se it is ordinaril) ordinaril) more e/pensi e/pensive ve tan long long term de*t. d. 8''setting 8''setting te pro'ita*il pro'ita*ilit) it) o' c(rrent assets assets and c(rrent c(rrent lia*ilities lia*ilities against against te pro*a*ilit) pro*a*ilit) o' tecnical tecnical insolvenc insolvenc). ). e. Maintaining Maintaining a ig ig proportion proportion o' li1(id li1(id assets to total total assets assets in order to ma/imi ma/imie e te ret(rn on total total investments investments..

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Starrs Starrs Compan) Compan) as c(rrent c(rrent assets o' 9+00,000 9+00,000 and c(rrent c(rrent lia*ilities lia*ilities o' 9200,000. 9200,000. Starrs Starrs co(ld increase increase its working working capital capital *) te  A. $repa)ment o' 9!0,000 o' ne/t )ear:s rent. ;. Re'inancing o' 9!0,000 9!0,000 o' o' sort"term sort"term de*t wit long"term de*t. C. $(rcase o' 9!0,000 o' temporar) temporar) investments 'or cas. 6. Collection o' 9!0,000 o' acco(nts receiva*le.

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A loc lock k"*o "*o/ s)st s)stem em  A. Red(ces te need 'or compensating *alances. *alances. ;. $rovides sec(rit) 'or late nigt deposits. C. Red(ces te risk risk o' aving cecks lost in te mail. 6. Accelerates te in'low o' '(nds.

> a. =ncrea =ncreased sed s)nc s)ncron ronia iation tion o' cas cas 'lows. 'lows. *. Mini Minimi mie e te te (se (se o' o' 'loa 'loat. t. c. Maintaining Maintaining an averag average e cas *alance *alance e1(al e1(al to tat re1(ired re1(ired as a compensati compensating ng *alance *alance or tat wic wic minimies minimies total total cost. d. %se o' cec cecks ks and and dra' dra'ts ts in in dis*( dis*(rsi rsing ng '(nds '(nds.. +. Wen managing cas and sort"term investments, a corporate corporate treas(rer is primaril) concerned wit wit  A. Ma/imiing rate o' ret(rn. ;. Minimiing ta/es. C. =nvesting in reas(r) *onds since since te) ave no de'a(lt risk. 6. i1(idit) and sa'et). 5. e economic economic order 1(antit) 1(antit) B78D 'orm(la 'orm(la can *e adapted in order 'or a 'irm to determine determine te optimal mi/ *etween cas cas and marketa*le marketa*le sec(rities. e 78 model ass(mes ass(mes all o' te 'ollowing e/cept e/cept a. e cost o' a transacti transaction on is independen independentt o' te dollar amo(nt amo(nt o' te transaction transaction and and interest interest rates are are constant constant over te sort sort r(n. *. An opport(n opport(nit) it) cost cost is associate associated d wit olding olding cas, *eginni *eginning ng wit te 'irst 'irst dollar. dollar. c. e tota totall demand demand 'or 'or cas cas is know known n wit wit certai certaint) nt).. d. Cas Cas 'low 'low re1 re1(i (ire reme ments nts are are rand random om.. !. e 'ollowing 'ollowing are are desira*le desira*le in cas cas managemen managementt e/ceptE e/ceptE a. Cas Cas is coll collect ected ed at te earl earlies iestt time time possi* possi*le. le. *. Most sales are on on cas cas *asis *asis and and receiva receiva*les *les are aged aged c(rrentG c(rrentG c. $ost"dated $ost"dated cecks cecks are not deposited deposited on time time (pon (pon mat(rit). mat(rit). d. All sales are proper properl) l) receipt receipted ed and and promptl) promptl) deposited deposited intact. intact. #. e one item listed *elow tat wo(ld warrant te least amo(nt o' consideration in credit and collection collection polic) decisions is te  A. (alit) o' acco(nts accepted. C. Cas disco(nt given. ;. (antit) disco(nt given. 6. evel o' collection e/pendit(res.

 a. =ncreased pa)a*les and increased *ank loan. *. =ncreased receiva*les. c. 6ecreased receiva*les. d. 6ecrease in cas. 2 a. $500,000 *. $+00,000 c. $2##,##< d. $?00,000

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Wildting Am(sement Compan)4s total assets 'l(ct(ate *etween 9+20,000 and 950,000, wile its 'i/ed assets remain constant at 92#0,000. =' te 'irm 'ollows a mat(rit) matcing or moderate working capital 'inancing polic), wat is te likel) level o' its long"term 'inancing> a. 9 @0,000 *. 92#0,000 d. 950,000 e. 9+20,000

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Karrett 7nterprises is considering weter to p(rs(e a restricted or rela/ed c(rrent asset investment polic). e 'irm4s ann(al sales are 9500,000L its 'i/ed assets are 900,000L de*t and e1(it) are eac !0 percent o' total assets. 7;= is 9+#,000, t e interest rate on te ' irm4s de*t is 0 percent, and te 'irm4s ta/ rate is 50 percent. Wit a restricted polic), c(rrent assets will *e ! percent o' sales. %nder a rela/ed polic), c(rrent assets will *e 2! percent o' sales. Wat is te difference in te pro3ected R87s *etween te restricted and rela/ed policies> a.. .#J *. #.2J c. +.?J d. !.5J

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;(ll) Corporation p(rcases raw materials on K(l) . =t converts te raw materials into inventor) *) Septem*er +0. owever, ;(ll) pa)s 'or te materials on K(l) 20. 8n 8cto*er +, it sells te 'inised goods inventor). en, te 'irm collects cas 'rom te sale  mont later on Iovem*er +0. =' tis se1(ence acc(ratel) represents te average working capital c)cle, wat is te 'irm:s cas conversion c)cle in da)s>  A. @2 da)s. ;. ++ da)s. C. 2+ da)s. 6. !+ da)s.

 A. 92!0,000 ;. 92,000 C. 9#,000 6. 9!,000 5. A compan) as dail) cas receipts o' 9!0,000. e treas(rer o' te compan) as investigated a lock *o/ service were*) te *ank tat o''ers tis service will red(ce te compan)4s collection time *) 'o(r da)s at a montl) 'ee o' 92,!00. =' mone) market rates average 5J d(ring te )ear, te additional ann(al income BlossD 'rom (sing te lock *o/ service wo(ld *e a. 9#,000. *. 9B#,000D. c. 92,000. d. 9B2,000D. !. A *anker as o''ered to set (p and operate a lock *o/ s)stem 'or )o(r compan). 6etails are given *elow.  Average n(m*er o' dail) pa)ments  Average sie o' pa)ments 6ail) interest rate Saving in mailing time Saving in processing time ;ank carges 7stimate te ann(al savings. Ass(me 2!0 processing da)s per )ear.  A. 9+,2 a. $#0,000 *. $?0,000 c. $ BAss(me a +#0"da) )ear.D a. 9?  A. 900 pro'it. ;. 9#5 loss. C. 9220 loss. 6. 92#5 loss. + a. 2H0, nH#0. *. 2H0, nH00. c. 2H0, nH@0. d. +H0, nH#0. 55. A compan) as acco(nts pa)a*le o' 9! million wit terms o' 2J disco(nt witin ! da)s, net +0 da)s B2H! net +0D. =t can *orrow '(nds 'rom a *ank at an ann(al rate o' 2J, or it can wait (ntil te +0t da) wen it will receive reven(es to cover te pa)ment. =' it *orrows '(nds on te last da) o'  te disco(nt period in order to o*tain te disco(nt, its total cost will *e  A. 9!,000 less. ;. 9