Andrew Co is a large listed company financed by both equity and debt.
In which of the following areas of financial management will the impact of working capital management be smallest?
A. Liquidity management
B. Interest rate management
C. Management of relationship with the bank
D. Dividend policy
Which of the following statements concerning working capital management are correct?
(1) The twin objectives of working capital management are profitability and liquidity
(2) A conservative approach to working capital investment will increase profitability
(3) Working capital management is a key factor in a company’s long-term success
A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
Which of the following statements concerning working capital management are correct?
1 Working capital should increase as sales increase
2 An increase in the cash operating cycle will decrease profitability
3 Overtrading is also known as under-capitalisation
A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A conservative approach to working capital investment will increase profitability
3 Working capital management is a key factor in a company’s long-term success
A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. 1, 2 and 3
Plot Co sells both Product P and Product Q, with sales of both products occurring evenly throughout the year.
Product P
The annual demand for Product P is 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month’s sales is maintained.
Product Q
The annual demand for Product Q is 456,000 units per year and Plot Co buys in this product at $1 per unit on 60 days credit. The supplier has offered an early settlement discount of 1% for settlement of invoices within 30 days.
Other information
Plot Co finances working capital with short-term finance costing 5% per year. Assume that there are 365 days in each year.
Required:
Identify the objectives of working capital management and discuss the central role of working capital management in financial management. (7 marks)
Critically discuss the similarities and differences between working capital policies in the following areas:
(i) Working capital investment;
(ii) Working capital financing.