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# Working capital investment required

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Question 20
&&& Nob-Orrow Inc. is considering an investment in a project that is similar in risk to its existing projects. The firm makes no use of debt and is entirely financed by common stock with a beta of 1.4. The expected return on the market portfolio is 10 percent and the risk-free rate is 4 percent. The required rate of return on this project is:

a. 14%
b. 6%
c. 12.4%
d. 10%
e. none of the above

https://brainmass.com/economics/investments/working-capital-investment-required-164514

#### Solution Preview

The answer is indicated below each question.
Question 20
&&& Nob-Orrow Inc. is considering an investment in a project that is similar in risk to its existing projects. The firm makes no use of debt and is entirely financed by common stock with a beta of 1.4. The expected return on the market portfolio is 10 percent and the risk-free rate is 4 percent. The required rate of return on this project is:

a. 14%
b. 6%
c. 12.4%
d. 10% ...

#### Solution Summary

This explains the steps of computation of working capital investment required

\$2.19

## Working Capital Management

A) Dan plans to use the preceding ratios as the starting point for discussions with SKI's operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data in the table, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?

b) How can one distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current asset because it is inefficient? Does SKI's working capital policy seem appropriate?

c) Calculate SKI's cash conversion cycle, assuming all calculations use a 360-day year.

d) What might SKI do to reduce its cash and securities without harming operation?

Q 23-3 What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Q 23-4 From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?

Q 23-5 If long-term credit exposes a borrower to less risk, why would people or firms ever borrow on a short-term basis?

Q 23-9 The availability of bank credit is often more important to a small firm than to a large one. Why?

Mini Case !

a) B&B tries to match the maturity of its assets and liabilities. Describe how B&B could adopt either a more aggressive or more conservative financing policy.

b) What are the advantages and disadvantages of using short-term credit as a source of financing?

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