Fin515 Week 7 Ch16

In: Business and Management

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Chapter 16 Working Capital Management
ANSWERS TO END-OF-CHAPTER QUESTIONS

16-1

a. Working capital is a firm’s investment in short-term assets—cash, marketable securities, inventory, and accounts receivable. Net working capital is current assets minus current liabilities. Net operating working capital is operating current assets minus operating current liabilities. b. A relaxed WC policy refers to a policy under which relatively large amounts of cash, marketable securities, and inventories are carried and under which sales are stimulated by a liberal credit policy, resulting in a high level of receivables. A restricted policy refers to a policy under which holdings of cash, securities, inventories, and receivables are minimized; while a moderate current asset investment policy lies between the relaxed and restricted policies. c. Permanent current operating assets are the current operating assets needed even at the low point of the business cycle. For a growing firm in a growing economy, permanent current assets tend to increase over time. Temporary current operating assets are the current operating assets required above the permanent level when the economy is strong and/or seasonal sales are high. d. A moderate short-term financing policy matches asset and liability maturities. It is also referred to as the maturity matching, or "self-liquidating" approach. When a firm finances all of its fixed assets with long-term capital but part of its permanent current assets with short-term, nonspontaneous credit this is referred to as an aggressive shortterm financing policy. With a conservative short-term financing policy permanent capital is used to finance all permanent asset requirements, as well as to meet some or all of the seasonal demands. e. The inventory conversion period is the average length of time it takes to convert materials into finished goods and then…...

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