Working Capital Investment Policy – Essayfount


The director of finance has forwarded you a scenario project to
assist him in gaining some insight into the profitability and risk
trade-offs of alternative polices. This insight will assist in making
better decisions concerning the company working capital policy, which
may lead to an increase in shareholder wealth.

For this scenario project, you will investigate the best combinations
of short-term and long-term debt to use in financing the company
assets. The director of finance is considering implementing one of the
following financing policies below: Aggressive, Moderate, or
Conservative. Ensure you show your work for all computations: 

Use the following information and assumptions in your scenarios:

  • The company’s annual sales and earnings before interest and taxes (EBIT) from its most recent 10-K report.
  • The company’s current assets from its most recent 10-K report.
  • The company’s fixed assets from its most recent 10-K report.
  • Use a fixed tax rate of 23.5% in all three scenarios.

 

Use the following growth assumptions to calculate Sales, EBIT, and current assets for each scenario:

Sales Growth Rate EBIT Growth Rate Current Assets Growth Rate
Aggressive Scenario 15% 15% 15%
Moderate Scenario 10% 10% 10%
Conservative Scenario 5% 5% 5%

 

Use the following assumptions to compute interest expense on long-term debt and short-term debt in each scenario:

Short-Term Debt Interest Rate Long-Term Debt Interest Rate
Aggressive Scenario 4% 7%
Moderate Scenario 3.5% 6%
Conservative Scenario 3% 5%

 

Use the following assumptions to calculate current liabilities as a % of projected current assets for each scenario:

Current Liabilities
Aggressive Scenario 80%
Moderate Scenario 60%
Conservative Scenario 40%

 

Assume current asset plus fixed assets are the total assets in all three scenarios.

Hold the total debt / total assets ratio at 50% for all three
scenarios. Therefore, stockholders’ equity is 50% of total assets in all
three scenarios.

Long-term debt equals total debt less current liabilities in all three scenarios.

For purposes of this assignment, current liabilities and short-term
liabilities are the same thing, and there are no other current
liabilities.

 

In your paper, determine the following for each of the three financing policies (Aggressive, Moderate, and Conservative):

  • Compute the expected rate of return on stockholders’ equity.
  • Compute the net working capital position.
  • Compute the current ratio.
  • Analyze the profitability versus risk trade-offs of these three polices.
    • Recommend a specific course of action to consider that will
      assist in making better decisions concerning the company working
      capital policy which may lead to an increase in shareholder wealth.

The Working Capital Investment Policy paper

  • Must be three to five double-spaced pages in length (not including
    title and references pages) and formatted according to APA style as
    outlined in the UAGC Writing Center’s APA Style
  • Must include a separate title page with the following:
    • Title of project
    • Student’s name
    • Course name and number
    • Instructor’s name
    • Date submitted
  • For further assistance with the formatting and the title page, refer to APA Formatting for Word 2013
  • Must utilize academic voice. See the Academic Voice
  • Must include an introduction and conclusion paragraph. Your
    introduction paragraph needs to end with a clear thesis statement that
    indicates the purpose of your paper.

    • For assistance on writing Introductions & Conclusions
  • Must use at least three credible sources in addition to the course text to support your analysis.
    • The Scholarly, Peer Reviewed, and Other Credible Sources
  • Must document any information used from sources in APA style as outlined in the UAGC Writing Center’s Citing Within Your Paper
  • Must include a separate references page that is formatted according
    to APA style as outlined in the UAGC Writing Center. See the Formatting Your References List

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