Question

Original question for problem 16 was:

inding the WACC. Organic Produce Corporation has 6.3 million shares of common stock outstanding, 350,000 shares of 5.8 percent preferred stock outstanding, and 150,000 of 7.1 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $74 per share and has a beta of 1.09, the preferred stock currently sells for $107 per share, and the bonds have 20 years to maturity and sell for 109 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent, and the firm’s tax rate is 34 percent.
a.	What is the firm’s market value capital structure?
b.	If the firm is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows?

Complete Problem 16 in Chapter 12 on Page 414 in the book (Organic Produce Corporation) and the supplement question below (based on your findings).

Problem 16, Question number 2 A and B are already answered below.

Prob 16:

a : Firm's market value capital structure = security quantity * market value of the security = 6.3m*74+0.35m*107+0.15m*1090=$667.15m

b: The firm should use the WACC to discount the projects' cash flows. The WACC of the firm = We*Ce + Wp*Cp+Wd*Cd*(1-t) Ce = Req return = rf + B * mp = 0.043+1.09*0.068=0.11712 The WACC of the firm = (466.2/667.15)*0.11712 + (37.45/667.15)*0.058 +(163.50/667.15)*0.071*(1-0.34) = 0.096583 or 9.66%

The question I need help with is below.... Question 4

Question 4 - In your own words explain what working capital management is and give an example of one way Organic Produce Corporation’s financial managers could improve the company’s working capital position?

Answer 1

Working capital management is that aspect of financial management that is concerned with efficient use of working capital.

Any new project will involve investment in working capital apart from the investment in capital assets, fixed assets etc. The working capital is blocked for the duration of the project. Therefore, the working capital investment is treated as a cash outflow at the beginning of the project, and a cash inflow at the end of the project.

Efficient management of working capital has these benefits :

• decrease the overall investment in working capital
• Optimize use of the resources
• Better liquidity ratios
• improved cash flow

To improve the company's working capital position, Organic Produce Corporation's financial managers could give incentives to the company's customers and debtors. For example, a cash discount of 1% could be given to those debtors/customers who pay their dues within 7 days. This way, the debtors number of days will reduce, cash flows will improve and the overall investment in working capital will decrease.