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# working capital for Apex Printing

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Mary sees you pass by her office the next day and waves you in to talk.

"Good morning," she says. "I need you to write some content for a report I'm preparing. I could do it myself, but I can't get to it before I have to leave town on business. This piece of the report is fairly straightforward. Given your expertise, I think you'll do a good job with it."

"Sure," you say. "Whatever I can do to help."

"Okay, good," she says. "This report is for potential investors. The section I want you to write is about working capital. I'd like you to explain what working capital is and provide an equation that can be used to compute it. Then follow that up by computing the working capital for Apex, using the same balance sheets you have for the PowerPoint presentation you're working on. Make sure to describe the trend."

"I think I understand what you want," you say. "It will be important to show whether the trend is improving, deteriorating, or moderating. Obviously, we want to demonstrate our need for external capital. However, another objective is to make the investor aware of the components of working capital, and how the components have changed over the last 2 years. Right?"

"Exactly," she says. "Let me know if you have any questions."

For this discussion, complete the following based on your conversation with Mary:

Explain what working capital is.
Provide an equation that can be used to compute it.
Follow that up by computing the working capital for Apex, using these balance sheets.

Apex Printing
Balance Sheets
As of December 31, 2013 and 2012
000\$ 000\$
Assets 2013 2012
Cash 6,000 5,700
Accounts Receivable 2,350 2,300
Inventory 12,100 6,500
Total Current Assets 20,450 14,500
Land 25,000 20,000
Building & Equipment 300,000 300,000
Less: Accumulated Depreciation - Building & Equipment (187,850) (160,000)
Total Long Term Assets 137,150 160,000
Total Assets 157,600 174,500

Liabilities and Stockholders' Equity
Accounts Payable 4,600 3,500
Salaries Payable 0 2,100
Interest Payable 1,500 0
Short Term Notes Payable 12,000 0
Taxes Payable 0 5,600
Total Current Liabilities 18,100 11,200
Mortgate Payable 54,950 100,000
Total Long Term Liabilities 54,950 100,000
Common Stock 60,000 60,000
Retained Earnings 24,550 3,300
Total Stockholders' Equity 84,550 63,300
Total Liabilities and Stockholders' Equity 157,600 174,500

Apex Printing
Income Statements
For the Periods Ended December 31, 2013 and 2012 000 \$ 000\$
2013 2012
Revenue: 450,000 475,000
Less: Cost of Goods Sold (324,300) (374,500)
Less: Depreciation Expense (27,850) (26,000)
Gross Margin 97,850 74,500
Selling, General & Administrative Expenses (29,100) (32,000)
Income Before Interest & Taxes 68,750 42,500
Interest Expense (7,500) (6,000)
Income Before Taxes 61,250 36,500
Income Taxes (35,000) (30,000)
Net Income 26,250 6,500

Apex Printing
Statement of Cash Flows
For the Period Ended December 31, 2013
000\$
Cash Flows from Operating Activities:
Net Income 26,250
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation Expense 27,850
Increase in accounts receivable (50)
Increase in inventory (5,600)
Decrease in salaries payable (2,100)
Increase in interest payable 1,500
Decrease in taxes payable (5,600)
Increase in Short Term notes Payable 12,000
Increase in accounts payable 1,100

Net Cash Flow from Operating Activities
55,350
Cash Flows from Investing Activities:
Cash paid to purchase land (5,000)
Net Cash Flow from Investing Activities
(5,000)
Cash Flows From Financing Activities:
Cash paid for mortgage (45,050)
Cash paid for dividends (5,000)
Net Cash Flow from Financing Activities
(50,050)
Net Increase in Cash
300
Plus: Cash Balance at December 31, 2012
5,700
Cash Balance at December 31, 2013
6,000

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#### Solution Preview

working capital
Mary sees you pass by her office the next day and waves you in to talk.

"Good morning," she says. "I need you to write some content for a report I'm preparing. I could do it myself, but I can't get to it before I have to leave town on business. This piece of the report is fairly straightforward. Given your expertise, I think you'll do a good job with it."

"Sure," you say. "Whatever I can do to help."

"Okay, good," she says. "This report is for potential investors. The section I want you to write is about working capital. I'd like you to explain what working capital is and provide an equation that can be used to compute it. Then follow that up by computing the ...

#### Solution Summary

The working capital for Apex printing are examined.

\$2.19

## Determining WACC given embedded assumptions

Mary Francis has just returned to her office after attending preliminary discussions with investment bankers. Her last meeting regarding the intended capital structure of Apex went well, and she calls you into her office to discuss the next steps.

"We will need to determine the required return for our intended project so that we have a decision criteria defined for the project," she says.

"Do you have the information I need to describe capital structure and to calculate the weighted average cost of capital (WACC)?" you ask.

"I do," she smiles. "We can determine the target WACC for Apex Printing, given these assumptions," she says as she hands you a piece of paper.

Weights of 40% debt and 60% common equity (no preferred equity)
A 35% tax rate
Cost of debt is 8%
Beta of the company is 1.5
Risk-free rate is 2%
Return on the market is 11%
"Great," you say. "Thanks."

"Be sure to indicate how these costs of capital might be used to determine the feasibility of the capital project," Mary says. "I want your recommendation about which is more appropriate to apply to project evaluation, too. Let me know what you think."

"One more thing," she says as she stands up to signal the end of the meeting. "You did a good job with the explanations you provided Luke the other day. Would you have time to define marginal cost of capital for me so I can include it in my discussions with investors? You seem to have a knack for making things accessible to non-financial folks."

"No problem," you say. "I'm glad my explanations are so useful!"

To recap, please assist with the following:

Describe capital structure.
Determine the WACC given the above assumptions.
Indicate how these might be useful to determine the feasibility of the capital project.
Recommend which is more appropriate to apply to project evaluation.
Define marginal cost of capital.

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