Unit5: Managing Current Asset

Question 1

What is the objective of Working Capital?

Answer 1

Minimize Liquidity Cost and insolvency risk

Question 2

What is working capital policy?

Answer 2

1.Conservative style: which its advantage is ~
Decrease liquidity risk

**Disadvantage: Increase Opportunity cost of return

**the company seek to increase the C.assets and decrease liabilities so the working capital ratio is high/increase under this style

2. Aggressive style: which seek to increase profitability by investing in opportunity cost(decrease)
   adv: profitability
   disadv: short term liquidity problem
   * *under this style the ratio is LOWER

Question 3

Notes on Working Capital

Answer 3

the Ratio is volatile by 
Inventory cost (Carrying cost) which increase the ratio 
carrying excessive inventory increase the cost of insurance and obsolescence/ spoilage

Question 4

what are the motives of holding cash

Answer 4

1. Transactional
2. Precautionary
3. Speculative

Question 5

how to determine the optimal level of idle cash/hold cash

Answer 5

by cost-benefit analysis
this mean u need to calculate the opportunity cost of holding cash idle against liquidity risk/insolvency of being unable to pay the loan when its due

Question 6

what is compensating balance

Answer 6

Minimum balance in bank that should be held, frozen balance with noninterest bearing, that is for bank rendering services for the company, so its like the company gives the bank a certain amount non withdrawal for certain time.

Question 7

What is Marketable Securities

Answer 7

Short term investment with Low Yield and Low Risk with highly active market

Question 8

type of Marketable Securities

Answer 8

1.Money Market: it include short term investment in equity and debt instruments
2. U.S Treasury as follow:
A. T-Bills with 1 Year or less and they r sold on Discount
B. T-Notes with 1-10years
C. T-Bonds more than 10 years

3. Federal Agencies Securities: are type of securities issued by U.S govt and held by full faith and credit of govt
4. Repurchase Agreement (Repos): is agreement between party and govt that first party buy a security from govt for 50 and the govt is committed to buy back the security for 70,
   * *Type of short term investment, Secured
5. Banker Acceptance is like certified check that is due in next couple months, so the holder offer to sell this cheque on Discount
6. Commercial Paper: is type of financing, issued by COMPANIES who need the fund, Short term, Unsecured, Usually sold at discount
7. Certificate of Deposit: is a deposit in bank for certain time and cant be withdrawn before maturities without HIGH Penalty