Multinational Management of Working Capital

The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.

Accounts receivable turnover measures how many times a company can turn its accounts receivables into cash. This ratio shows how well the company is collecting credit sales from its customers. The equation for accounts receivable turnover

This paper explores the different types of nonliquidating distributions and how they distributed to shareholder in a corporation from research collected online (Internet) and offline (non-Internet). The online research was done using sites including the IRS website, ProQuest and EBSCOhost. The majority of the offline was done using the textbook McGraw-Hill’s Taxation of Business Entities: 2016 Edition. The different types of nonliquidating distributions includes property distribution, dividend from earnings and profits, constructive dividends, stock redemptions, and partial liquidation. Form 1099-DIV will be shown in the appendix to show the distribution of dividend to shareholders. The research indicated that each type of nonliquidating distribution is important to the corporation. The purpose of this paper is to give a general overview of how companies handle nonliquidating distributions throughout the year and to provide an explanation of the distributions.

The four options for dividend disbursement that FPL has are to first to keep the dividends at the status quo of 1.6%, second to slower the dividend growth to 1%, third to freeze dividend, and last to reduce or eliminate the dividend completely. When analyzing the first option, which is the keep the dividends at an increasing 1.6% per year, exhibit TN-4 shows that dividend payouts do increase from $468.38 million in 1994 to $499.08 million in 1998 with a resulting negative net cash after dividends every year till 1997 when cash is $110 million and 1998 when cash is $102 million. The payout ratio however does reduce to 84% by 1998.

“The short-term liquidity ratios are used in the evaluation of short-term liquidity to convert current assets into cash in order to reduce the financial obligations of the company as they become due” (Covee 2010 pg.45). These ratios are particularly significant to the creditors and potential lenders of a company because they determine the ability of that company to meet current payments of a debt.

The Working Capital measures both the company’s effectiveness and it’s immediate financial health. The working capital ration is calculated by subtracting the current assets from the current liabilities. The Working Capital for my company is $-17,210. A positive working capital means that the company will be able to pay its short-term liabilities. A negative working capital means a company can not pay its short-term liabilities.

Working Capital is again in the red zone, dropping more than 75% from FY09 to FY10. However, the historic trend for the company is not very impressive, with working capital dropping as low as -$3 billion. The Operating Cash Flow Ratio is somewhat more reassuring, standing at 18.13 in FY10 from 14.67 a year earlier. This implies that for every dollar of current liability, the operations are providing $18 of revenue to cover the expense. However, operations are not primarily meant to cover just short term obligations, but also long term costs. Thus it cannot be justified that operations are very adequate to meet ST obligations.

With this company the inventory management ratios further indicate that there may be an issue with inventory and inventory controls. The inventory turnover ratio is lower than the industry average and the days’ sales in inventory are high. A company wants to turn inventory quickly to reduce storage costs, and

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

Liquidity is an important factor in financial statement analysis since an entity that can not meet its short term obligations may be forced into liquidation. The focus of this aspect of analysis is on working capital, or some computer of working capital.

Accounts receivable turnover is the second method by which a company’s trade receivables’ liquidity can be evaluated (Gibson, 2011). Žager et al. (2012) noted turnover ratios should be as high as possible as this indicates a firm’s ability to convert its assets more often. 3M’s accounts receivable turnover for years 2007 and 2008 is shown in Exhibit 2. In 2007, 3M turned its accounts receivable over 7.12 times and 7.70 times in 2008. This calculates into a turnover of its accounts receivable every 51.28 days in 2007 and 47.38 days in 2008. The increase in accounts receivable turnover times per year (decrease in number of days to turnover accounts receivables) from 2007 to 2008 is a positive trend for 3M. It suggests, along with the prior calculation, the management of receivables is likely to be improving in efficiency.

The firm’s accounts receivable ratio increased from 68.71 in 2006 to 74.56 in 2010. This means that it is taking Abbott almost six days longer to collect from its customers today than it did five years ago. Furthermore, the firm’s accounts payable days has decreased from 43.72 in 2006 to 38.22 in 2010. This means that Abbott is paying its suppliers 5½ days earlier today than it did in 2006. A change in the inventory ratio from 8.01 in 2006 to 11.03 in 2010 indicates that it is taking the firm longer to sell finished goods than it used to. The increase in the accounts receivable and inventory ratios, combined with a decrease in the accounts payable ratio, indicates poor working capital management and helps to explain why the firm has increased its holdings of cash and short-term investments. To correct this, Abbott’s managers should focus on collecting cash from its customers faster and delaying payments to its suppliers. To maximize its cash position, the firm would be best served by paying its suppliers in the same amount of time as it collects payment from its customers.

The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.

Dividends are subjected to higher tax rate compare to capital gain increased due to share buy-back. This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy.

Furthermore, if an organisation does not have enough cash resources in order to settle its current liabilities, this will highlight great inefficiency with stock turnover not being sold. A good company such as Sainsbury’s we see is healthy because revenue is recognised from inventories sold – this revenue allows cash to flow in order to pay for short term and long-term liabilities. It is evident that there are insufficient cash flowing into the company from investing activities and financing activities, which are shown by the brackets.