Finance Problem Solving Assignment Example | Topics and Well Written Essays - 1000 words

Finance Problem Solving - Assignment ExampleTherefore, Amber has a net working capital of $200 and a current ratio of 1.20. This indicates that the comp whatever will be able to pay any short term obligations that arise unexpectedly cod to some investment in the working capital. On the other hand, Barbie has no current assets, but has $600 worth of current liabilities. Therefore, Amber has a net working capital of prejudicial $600 and a weak current ratio. This indicates that the high society will not be able to pay any short term obligations that arise unexpectedly due to no investments in the working capital. Amber Barbie Current Assets $1,200 $0 Current Liabilities $1,000 $600 Net work peachy $200 ($600) Current Ratio 1.20 0.00 Therefore, it is important for a corporation to invest some of its funds in the financing of the working capital. A company moldiness be able to pay its creditor when payment becomes dues, and have got ample inventory and cash to ensure the smooth fu nctioning of the company. Question 4 A firm achieves optimal level of working capital lone(prenominal) when the constituents of the working capital achieve optimal position. The company must have a favorable level of inventory determined by the economic parliamentary procedure quantity. It must work upon optimal lead times that ensure no shortfall and no excess inventory at any point in time. This will ensure minimum costs association with the inventory handling. Likewise, the company must forecast future cash inflows and outflows, risk tolerance and borrowing cleverness to ensure an optimal cash level. An excess surplus must be invested in short term securities, whereas a shortage must be outright handled with an overdraft with the bank. Similarly, the company could determine its advantageous days sales outstanding which will allow it to make an effective policy toward the management of its receivables. (Brigham and Gapenski 1988) Question 6 The matching principle of the workin g capital financing states that the non-current assets and unchanging current assets must be financed by long term debt whereas fluctuating current assets must be financed by short term debt. (Brigham and Gapenski 1988) For instance A retail store balance sheet shows inventory, cash, account receivable and fixed assets. At any point in time, this store has a minimum amount of all current assets which becomes a part of the permanent current assets. Therefore, according to this matching principle, these permanent current assets and fixed assets are to be financed by long term debt. There is low cost associated with this technique as most of the assets are finance low interest long term debt. Likewise, it results in a higher profitability as interest expense is low in this strategy. It also provides the company with more liquidity and a better current ratio. (Brigham and Gapenski 1988) Problem 17-3 Company A Company B Current Assets $1,400 $960 Current Liabilities $900 $600 Net Workin g Capital $500 $360 Current Ratio 1.56 1.60 Company A appears to be more liquid as compared to company B. This is because it has a higher net working capital. flat though company A has slightly lower current ratio, it holds more of its assets in the liquid form. Problem 17-6 a. Working Capital = $160 b. Net Working Capital = Current Assets Current Liabilities Net Working Capital = $160 - $170 Net Working Capital = ($10) c. The company is following a truly aggressive approach to working capital financing. This is indicated by a low net working capital which shows that all of the current assets