Explain the graph in the context of working capital management.Risks vs. Costs Trade-Off(Conservative Approach)Firm can reduce risks associated with short-term borrowingby using a larger proportion of long-term financing.Short-term financingCurrènt assetsLong-term financingFixed assetsTIMEDOLLAR AMOUNT

Working Capital Management is a business strategy in which businesses design their strategies to…

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Explain the graph in the context of working capital management.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 10QTD

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Explain how to classify working capital according to its “components” and accordingto “time” (i.e., either permanent or temporary) AND Describe the hedging (maturitymatching) approach to financing and the advantages/disadvantages of short- versuslong-term financing.
Defining capital investment terms Fill in each statement with the appropriate capital investment analysis method: Payback, ARR, NPV, or IRR. Some statements may have more than one answer. a. —–— is (are) more appropriate for long-term investments. b. —–— highlights risky investments. c. —–— shows the effect of the investment on the company’s accrual-based income. d. —–— is the interest rate that makes the NPV of an investment equal to zero. e. —–— requires management to identify the discount rate when used. f. —–— provides management with information on how fast the cash invested will be recouped. g. —–— is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset. h. —–— does not consider the asset’s profitability. i. —–— uses accrual accounting rather than net cash inflows in its computation.
1. Explain the profitability-risk trade-off of alternative levels of working capital balances. 2. Explain the profitability-risk trade-off of alternative methods of financing a given working capital investment. 3. Discuss the profitability versus risk trade-offs associated with alternative levels of working capital investment. 4. A. which of the following working capital financing policies subjects the firm to a greater risk?i. Financing permanent current assets with short-term debtii. Financing fluctuating current assets with long-term debtB. Which policy will produce the higher expected profitability?
Defining capital investment terms Fill in each statement with the appropriate capital investment analysis method: Payback, ARR, NPV, or IRR. Some statements may have more than one answer. __________ is(are) more appropriate for long-term investments. __________ highlights risky investments. ____________ shows the effect of the investment on the company’s accrual-based income. ___________ is the interest rate that makes the NPV of an investment equal to zero. __________ requires management to identify the discount rate when used. _________ provides management with information on how fast the cash invested will be recouped ___________ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset. __________ does not consider the asset’s profitability __________ uses accrual accounting rather than net cash inflows in its computation.
“Efficient working Capital management leads to improve the operating performance of the business concern and it helps to meet the short-term liquidity” Do you agree with the above statement? Explain. What are the types of working capital policies? Explain and compare of working capital financing policies in criteria of (1) Approach (2) Risk level (3) Profitability (4) Interest costs, and (5) Liquidity management.
The purpose of capital budgeting is to: Group of answer choices Avoid all projects that involve risk control the short-term financing used by a firm. determine the correct mix of debt and equity for a firm. identify assets/projects that produce value in excess of their cost.
Discuss the following terms Primary Market Secondary Market Capital Market Financial Market The spontaneous sources of short-term financing Capital asset pricing model
Discuss the payback period, NPV (net present value), and IRR (internal rate of return) methods for capital budgeting analysis. What result does each method provide the user? What are the limitations of each of these methods? Which method would you find most useful in making the best investment decisions for your business and why?
A firm's overall cost of capital is Select one :. A. Best measured by the cost of capital of the riskiest projects that the firm is working on B. a weighted average of the costs of capital for the collection of individual projects that the firm is working on C. equal to its cost debt d. None of these
An Aggressive Working Capital policy has the following characteristics: A. Low current assets and high current liabilities and a high current ratio B. High long-term loans, low investment in inventory and high debt ratio C. High levels of investment in inventory and debtors and a high current ratio. D. Low levels of investment in inventory and debtors and a low current ratio.
Profitability index. It is a ratio that provides information about the present value of net cash flows to the net investment. It provides a measure of the relative present value return for each dollar of initial investment. Discuss its usefulness. Should managers rely upon it? Consider its usefulness in a capital rationing situation (capital investment under conditions of financial restraint).
True or False: In solving a capital budgeting problem involving investment opportunities that are divisible (i.e., you can invest in portions of the opportunities instead of “all or nothing”), you rank the opportunities on thebasis of internal rate of return and add to the portfolio opportunities andfractions of opportunities, beginning with the largest internal rate of return,until “the investment bucket is filled.”