III- Working Capital Management
A- Applegate Bicycle Company is trying to devise an aprópiate working capital policy. Their most recent balance sheet is as follows: Balance Sheet, December 31, 20X5 (in thousands)
Assets Liabilities and Owner's Equity
Cash $ 30 Accounts payable $35
Accounts Receivable 50 Notes payable 10
Inventories 30 Accruals 5
Current Assets $110 Current Liabilities $50
Net fixed assets 150 Mortgage loan (at 13%) 80
Common equity 130
Total liabilities and
Total assets $260 owner's equity $260
You know that net profits in 20X5 were $28,000.
1- What is Applegate's current level of working capital?
2- What percentage of total assets is invested in working capital?
3- Calculate Applegate's return on investment (ROI).
4- Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures. What has happened? What warning would you offer?
1- Applegate's current level of working capital is the excess of its current assets ($110) over its current liabilities ($60), or $50.
2- Of Applegate's total assets of $260, $110 is invested in current assets. Therefore, $110/$260=.4231, or 42.31 percent.
3- Applegate's return on investment is its net profits divided by its total assets. Therefore, $28/$260=.1077 or 10.77 ...
This solution addresses the computation of working capital, the computation of current assets as a percentage of total assets, and the effect of a change in working capital on return on investment.