B2-M3

Question 1

Working capital policy/management

Answer 1

• optimal mix (offsetting benefit )of current assets and current liabilities against probability of technical insolvency
• matches maturity life of each asset w/ length of financial instrument used to finance asset
• goal is shareholder wealth maximization

Question 2

Net working capital formula

Answer 2

= Current Assets- Current Liabilities

-less working capital= increased risk

Question 3

Current ratio

Answer 3

=Current Assets/ Current liabilities

• measurement of short-term solvency
• ability of firm to generate ST obligations

Question 4

Quick Ratio (Acid test)

Answer 4

=Cash+Marketable securities+receivables / Current liabilities

Question 5

Cash conversion cycle (Net operating cycle)

Answer 5

=Inventory conversion period + Receivables collection period - Payables deferral period
-length of time from date of initial expenditure to the date cash is collected from customers offset by length of time it takes to pay vendors

Question 6

Inventory turnover

Answer 6

= cost of goods sold (sales) / average inventory

Question 7

Inventory conversion period

Answer 7

= 365/ inventory turnover

Question 8

Accounts receivable turnover

Answer 8

= credit sales/ Average accounts receivable

Question 9

Receivables collection period (Days sales outstanding)

Answer 9

=365/ accounts receivable turnover

Question 10

Greatest risk of not meeting maturing obligations

Answer 10

Permanent current assets with ST debt