Question

Business Finance

Theory Questions

1. Define working capital? How is it measured?
2. Calculate the amount of working capital for Snider Corporation

SNIDER CORPORATION

Balance Sheet

December 31, 2010

Assets

Current assets:

Cash.................................................................................. $ 50,000

Marketable securities....................................................        20,000

Accounts receivable (net)............................................. ...... 160,000

Inventory...................................................................... ....   200,000

Total current assets....................................................... .... $430,000

Investments.................................................................. ........ 60,000

Plant and equipment............................................................ 600,000

Less: Accumulated depreciation.................................. ..... (190,000)

Net plant and equipment............................................... ...    410,000

Total assets................................................................... .... $900,000

Liabilities and Stockholders’ Equity

Current liabilities

Account payable........................................................... ...... $90,000

Notes payable...............................................................        70,000

Accrued taxes...............................................................      10,000

Total current liabilities.................................................. ...... 170,000

Long-term liabilities:

Bonds payable..................................................................     150,000

Total liabilities.............................................................. .... $320,000

Stockholders’ equity

Preferred stock, $50 per value...................................... ...... 100,000

Common stock, $1 par value........................................ ........ 80,000

Capital paid in excess of par............................................... 190,000

Retained earnings......................................................... ....   210,000

Total stockholders’ equity.................................................. 580,000

Total liabilities and stockholders’ equity.......................... $900,000

3. Answer the following regarding financing assets:
   1. Explain the “aggressive”, “conservative” and “moderate” approaches to financing fixed assets, permanent current assets and temporary current assets.
   2. What are the potential risks and rewards of each approach?
   3. Give an example of when a conservative approach is more appropriate.
   4. Give an example of when an aggressive approach might be more appropriate.

4. Describe the Term Structure of Interest Rates and explain the following theories:
   1. Liquidity Premium Theory
   2. Market Segmentation Theory
   3. Expectations Hypothesis Theory

Answer 1

1. Working Capital is a financial metric which represents oprating liquidity available to a business, organizations, or other entity, including government entities. In short, it is the cash and other liquid assests that a business has on hand to cover day-to-day business. It is calculated by subtracting business current liabilities from business current assets.
2. Working Capital of Snider Corporation is as follows:

• Total Current Assets: $430000
• Total Current Liabilities: $170000
• Working Capital = $430000-$170000 = $260000