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# Working Capital

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BELOW ARE TWO PROBLEMS THAT I NEED SOLVED. I HAVE ALSO ATTACHED A WORD DOCUMENT WITH THE PROBLEMS IN FORMAT THAT IS EASIER TO UNDERSTAND. THEY ARE ALSO LOCATED IN PDF FORMAT ON PAGE 170 THANKS.

1. Two companies, A and B, have the following balance sheet accounts:
A B
Current assets \$ 150 \$ 800
Fixed assets 300 2200
Current liabilities 75 600
Long-term debt 75 1000
Equity 300 1400
a. Compute values for all of the ratios that measure working capital for firms A
and B.
b. Compare Firm A to B with regards to its need for working capital and how it
finances its working capital (short-term vs. long-term financing).

2. The Latigo Company has the following financial information:
Sales \$ 200
Cost of goods sold 100
Depreciation 40
Interest expense 2
Tax 7
Net profit \$ 7
Cash \$ 5
Accounts receivable 20
Inventory 25
Fixed assets 50
Accounts payable 5
Note payable 15
Long-term debt 20
Equity 70
a. The current assets to sales ratio for the industry is 0.20. State whether Latigo
make more or less use of working capital than the industry.
b. Compute the working capital turnover for Latigo and for the industry.
c. Compute the operating cycle and the cash conversion cycle for Latigo.
d. The industry average cash conversion cycle is 112 days. Compare the industry
to Latigo and identify any inferences that you can make.

#### Solution Preview

1.

Current Ratio is Current Assets/Current Liabilities
Working Capital is Current Assets - Current Liabilities
For A
Current Ratio = 150/75 = 2
Current Assets/Total Assets = 0.33
Working Capital = 75
For B
Current Ratio = 1.33
Current Assets/Total Assets = 800/3000=0.26
Working Capital = 200

b. If we look at A, 50% of the current assets are financed by short term financing and 50% is from long term financing. For B, 75% of the current assets are financed by short term financing (current liability) and 25% is long term finance. A can be said to be following a conservative policy where 50% current assets are being financed by long term financing. The policy followed by B is more ...

#### Solution Summary

The solution has the analysis of working capital for 2 companies.

\$2.19