Question

 

1. What is the definition of operating capital and why it important to managers?

2. What are two advantages of organizing a business as a partnership or sole proprietorship?

3. Define and give an example of a progressive income tax.

Answer 1

1. Net Operating Capital (NOC) is the sum of all assets used in the operations. This includes current assets as well as non current assets. It computed as the sum of net operating working capital (NOWC) along with the operating non-current assets. NOWC, in turn, is the difference between operating current assets and operating current liabilities.

Net operating capital is important for managers in order to calculate free cash flows (FCF). Because, FCF is the net amount after deducting Net Operating Capital (NOC) from Net Operating Profit After Tax (NOPAT).

2. Advantages of partnerships and sole proprietorship are the following:

• Continuity of ownership and management. There is no threat of change in management like in the case of companies which are prone to take over when majority of the stake change hands.
• Simple procedures for formation. As a result, pre operating expenses are less when compared to corporations.
• No Double taxation- Income of corporation is taxed in its hand first and then in the hands of share holders when dividend is paid. But in the case of partnership or proprietorship, income is taxed only in the hands of the owners (partners or proprietors, as the case may be)

3. Progressive Taxation is the method of taxation in which tax rate increase progressively with increase in the taxable amount. Examples are wealth tax, sales tax on high end consumer goods etc.