Question

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

Working Capital : it is the fund availble for a company or firm to meet their daily cash requirement to run run their daily operations. Usually it is the difference between current liabilities of a firm such as cash, accounts recievables, unpaid bills, inventories and other marketable securities and its current liabilities such as accounts payable.

Working capital is a measure of a company's liquidity, operational efficiency and its short-term financial health. If a company has substantial positive working capital, then it should have the potential to grow. If a company's current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors, or even go bankrupt.

So it can be measured by subtracting current liability from current asset of a firm i.e. Current Assets - Current Liabilities = Working Capital or Net working Capital.

Now, for Snider Corporation working capital would be : Current Assets ( Cash + Marketables securities + Accounts Recievables + Inventory ) - Current Liability ( Accounts Payable + Notes payable + Accrued Taxes ) = $ 430000 - $170000) = $260000 is the working capital for Snider Corporation.