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Case summary:
Chief financing officer of Company RR, a speciality coffee manufacturer, is re-thinking about its working capital policy and wants to re-new its line of credit and it wouldn’t ready to build payroll, probably forcing the company out of business.
The scare has forced the company to examine carefully about each component of working capital to make sure it is required, and decide whether the goal is to determine the line of credit are often eliminated entirely.
Previously, it has done little to look at assets and mainly because of poor communication among business functions and the decisions about working capital cannot be made at vacuum.
To discuss: The way person X will distinguish between a relaxed but rational assets policy and a situation within which a company merely has excessive current assets because it is inefficient and whether company RR working capital policy is appropriate or not.
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Intermediate Financial Management (MindTap Course List)
- Define negative working capital. Is a negative working capital a sign of illiquidity or of liquidity? Use the framework identified by Fazzari and Petersen, 1993arrow_forwardWhy might it be rational for a small firm that does not have access to the capital markets touse the payback method rather than the NPV method?arrow_forwardIs the Capital Asset Pricing Model now irrelevant given that other factors have been developed?arrow_forward
- What are the possible actions that a firm can take if it experiences a financial failure?arrow_forwardIn understanding capital structure, one approach, which I adopt, is to demonstrate, under certain assumptions, that financing decisions are irrelevant – in that they have no impact on firm value. Then, we show how relaxing these assumptions impacts optimal financing choices. Group of answer choices True Falsearrow_forwardWhich combination of investment policy and financing policy related to working capital provides the lowest risk but entails the lowest potential profits? relaxed, conservative restricted, conservative relaxed, aggressive restricted, aggressivearrow_forward
- Spending too little on fixed assets is also harmful to the firm how?arrow_forwardWhat does a negative value for unlevered free cash flow imply for the claimants of a firm?arrow_forwardwhy is knowledge of the money market important for carrying out value maximizing working capital short term management?why are opportunity cost of not taking account the risk return trade off of the various short term instruments?arrow_forward
- Why should a firm's investments always exceed its cost of capital?arrow_forwardWhat effect would a decreased cost of capital have on a firm's future investments?arrow_forwardWhich of the following contentions concerning the static trade off theory of capital structure are true? (i) The optimal capital structure depends upon both the value of the tax shield and on the costs of financial distress. (ii) Costs of financial distress decrease as the amount of debt in the capital structure increases. (iii) The value of the tax shield increases as the amount of debt in the capital structure decreases. (iv) The cost of financial distress does not depend upon the nature of the firm's assets. O Only (i) and (iv) are true. O Only (iv) is true. O Only (i) is true. None are true. O Only (ii) and (iii) are true.arrow_forward
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