Reference no: EM133055895
1. Dell Computer Corporation (DELL) has long been recognized for its innovative approach to managing its working capital. Describe how Dell pioneered the management of net working capital to free up resources in the firm.
2. Define and contrast the terms working capital and net working capital.
3. (Risk-return trade-of f) CL Marshall Liquors owns and operates a chain of beer and wine shops throughout the Dallas-Fort Worth metroplex. The rapidly expanding population of the area has resulted in the firm requiring a growing amount of funds. Historically, the firm has reinvested earnings and borrowed using short-term bank notes. Balance sheets for the last 5 years are found below.
2011 2012 2013 2014 2015
Current Assets $100 $130 $160 $190 $220
Fixed Assets 250 270 290 310 330
Total $350 $400 $450 $500 $550
Current Liabilities $50 $90 $130 $170 $210
Long-term Liabilities 100 100 100 100 100
Owner's Equity 200 210 220 230 240
Total $350 $400 $450 $500 $550
a. Compute the firm's current ratio (current assets divided by current liabilities) and the firm's debt ratio (current plus long-term liabilities divided by total assets) for the 5-year period found above. Describe the firm's risk using both the current ratio and debt ratio.
b. Alter the financial statements above such that current liabilities remain constant at $50 and long-term liabilities increase in the amount needed to meet the firm's financing requirements. Compute the firm's current ratio (current assets divided by current liabilities) and the firm's debt ratio (current plus long-term liabilities divided by total assets) using the revised financial statements you have prepared for the 5-year period 2011-2015. Describe the firm's risk using both the current ratio and debt ratio.
c. Which of the financing plans is more risky? Why?
4. (Hedging principle) A popular theory for managing risk to the firm that arises out of its management of working capital (that is, current assets and current liabilities) involves following the principle of self-liquidating debt. How would this principle be applied in each of the following situations? Explain your responses to each alternative.
a. Longleaf Homes owns a chain of senior housing complexes in the Seattle, Washington, area. The firm is presently debating whether it should borrow short or long term to raise $10 million in needed funds. The funds are to be used to expand the firm's care facilities, which are expected to last 20 years.
b. Arrow Chemicals needs $5 million to purchase inventory to support its growing sales volume. Arrow does not expect the need for additional inventory to diminish in the future.
c. Blocker Building Materials, Inc. is reviewing its plans for the coming year and expects that during the months of November through January it will need an additional $5 million to finance the seasonal expansion in inventories and receivables.
5. (Cost of secured short-term credit) The Marlow Sales and Distribution Co. needs $1.5 million for the 3-month period ending September 30, 2015. The firm has explored two possible sources of credit.
a. Marlow has arranged with its bank for a $1.5 million loan secured by its accounts receivable. The bank has agreed to advance Marlow 75 percent of the value of its pledged receivables at a rate of 9 percent plus a 1 percent fee based on all receivables pledged. Marlow's receivables average a total of $1.75 million year-round.
b. An insurance company has agreed to lend the $1.5 million at a rate of 8 percent per annum, using a loan secured by Marlow's inventory of salad oil. A field-warehouse agreement would be used, which would cost Marlow $2,000 a month. Which source of credit should Marlow select? Explain.