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In: Finance

Outdoor Adventures Inc. is in a highly seasonal business, and the following summary balance sheet data...

Outdoor Adventures Inc. is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars): Peak Off-Peak Cash $ 50 $ 30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 500 500 Total assets $690 $620 Spontaneous liabilities $ 30 $ 10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims $690 $620 What can we conclude from this data?

a. Without income statement data, we cannot determine the aggressiveness or conservatism of the company’s working capital financing policy. b.

Ski Lifts follows a relatively conservative approach to working capital financing; that is, some of its short-term needs are met by permanent capital. c.

Ski Lifts’s working capital financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt.

d. Ski Lifts’s working capital financing policy calls for exactly matching asset and liability maturities.

Solutions

Expert Solution

Answer : b. Ski Lifts follows a relatively conservative approach to working capital financing; that is, some of its short-term needs are met by permanent capital.

Explanation: Due to the seasonal nature of business, it takes a conservative & measured approach into financing its current asset, short term liability or debt using permanent capital in order to cope up running cost or fluctuation which could result due to less/low revenue during the off peak period and cut the company's spending on certain short term needs.


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