CORPORATE FINANCE

Accounting and Corporate Finance

Part A)

Calculate the net working capital required each year by FabX7 series car project. Assume that the level of net working capital will be a constant percentage of the project's sales. (Ignore cash and equivalent items while measuring working capital).

MaxiCooper

Balance sheet

For the year Ended Dec 31st 2010

 

 

 

 

Assets

 

Liabilities

 

Cash

8,625

Current Liabilities

 

inventory

867

Creditors

8,309

Debtors

4731

 

 

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

8,309

Total current assets

14,223

 

 

 

 

 

 

Fixed Assets

 

Owner's Equity

 

Net Fixed Assets

2,277

 

 

Intangibles

5000

 

 

Other non-current asset

5000

Owner's Equity

18,191

Total Fixed Assets

12,277

 

 

 

 

 

 

Total Fixed Assets

26,500

 

26500

Working Capital = Total current assets - Total Current Liabilities

= 14,223- 8,309

= 5914

Net working Capital

1st year 3% increased

2nd year 20% increased

3rd year 15% increased

4th year 10% increased

5th year10% increased

5914

6091.42

7309.704

8406.1596

9246.77556

10171.45312

b)

Working capital (called working capital) represents the excess of current assets over current liabilities: END = current assets - current liabilities (current)

Net working capital is also the permanent capital of the company. Companies must maintain an appropriate level of net working capital to ensure the proper relationship between the rate of growth of the company, its sales and the level of current assets. For example, sales growth will need to maintain higher inventory levels and this in turn determines the demand for funds necessary to finance them.

The appropriate level of net working capital to avoid:

High cost of raising capital to finance current business activity,

Losses resulting from having a quick sale of assets (even below their value) in order to raise capital for current business.

Management Strategies amount of net working capital are two:

Conservative:

Is to maintain the high level of current assets and a low value of current liabilities ,

In effect, gives the company a high cash flow but also reduces its profitability.

Aggressive:

Goal is to keep low-value assets in relation to current liabilities,

Effect is to reduce the financial liquidity,

Resulting in increased profitability.

Moreover, this indicator shows the amount of working capital, free short-term (current) liabilities, i.e. proportion of the working capital of the company, which is financed from long-term sources and which cannot be used for repayment of this debt. The growth of NWC means improving the liquidity of the company and increases its credibility. At the same time, too large values ??of working capital may indicate an inefficient financial policy of the company, which leads to a decrease in profitability (e.g., choice of long-term, but more expensive sources of funding; unjustified reduction in accounts payable, etc.).

From a theoretical standpoint, the usefulness of working capital is focused on its ability to measure the balance equity of the entity, since the existence of a positive working capital (current assets greater than current liabilities) to establish the existence liquid assets to a greater extent that debts maturing in the short term. In this sense, it can be seen that the presence of a negative working capital may be indicative of asset imbalance. This should be treated under the consideration that this situation does not affirm the bankruptcy or insolvency of the accounting entity.

The simplification provided by working capital motivates its widespread use in the practice of financial analysis. The supplementary analysis of the average period of maturation, as well as the specific period of maturity of short-term debt and availability of resources, complement ...