Chapter 8: Overview of Working Capital Management. Q 1.

Hoskins Hiking Boot Company is trying to devise an appropriate working capital

policy. Their most recent balance sheet is as follows: BALANCE SHEET, DECEMBER 31, 2001 (in thousands) ASSETS LIABILIIES AND OWNER'S EQUITY Cash $30 Accounts payable $35 Accounts receivable 50 Notes payable 10 Inventories 30 Accruals 5 Current Assets 110 Current liabilities 50 Net fixed assets 150 Mortgage loan (at 13%) 80 Common equity 130 Total liabilities & Total assets $260 Owner's equity $260 You know that net profits in 2001 were $28,000. a. b. c. d. What is Hoskin's current level of working capital? What percentage of total assets is invested in working capital? Calculate Hoskins' return on investment. Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures.

GWC = current assets = $110; NWC = CA - CL = $110 - $50 = $60 $110 / $260 = 0.423 or 42.3% ROI = Net Profits / Total Assets = $28/$260 = 10.77% GWC=$99; NWC=$54; Proportion = $99/$249 = 39.8%; ROI = $28 / $249 = 11.24%

Q 2. Devise a financing plan, assuming that your objective is to use a maturity

matching policy for Hoskins Hiking Boot Company. The firm has had the following quantity of fixed and current assets over the past five years: Ending Fixed Assets Current Assets

Date 6/1999 12/1999 6/2000

(millions) $100 100 110

(millions) $ 80 100 90

In this particular problem we can see that current assets represent from 43% to 48% of total assets. Given the consistency and necessity of current assets, we could design a financing plan where a majority of our current assets were financed with LT financing (LT Debt, common stock, preferred stock). If we forecasted out our needs it would be reasonably safe at this point to finance roughly $90 of current assets with a long-term form of financing. We could take a more aggressive approach (more ST financing) if we were willing to accept the risks associated with that decision. We could also finance with more longterm financing and reduce our risk and our expected return.

3.

Explain the differences between the following pieces of terminology: 'working capital management', 'net working capital', and 'gross working capital'. Your Answer: abc

Suggested Response: Working capital management refers to the overall management of the firm's current assets and their associated financing. Thus, it is 'big picture' of what the firm is doing. Net working capital and gross working capital are terms that are often used interchangeably with the phrase 'working capital' but they are different. Accounting professionals often are referring to net working capital which is the difference between current assets and current liabilities. Finance professionals are often referring to gross working capital which represents the

firm's investment in current assets only.