1. Explain the importance of working capital in terms of liquidity and short-term solvency position of a firm. 2. What do you understand from working capital? What are its different forms? 3. Net working capital is much useful in taking decisions', do you agree with the statement? Comment and justify. 4. "Working capital is two-edged sword, its excessive and deficit availability are equally bad". Comment and justify your answer with appropriate examples. 5. What are the different factors affecting the requirements of working capital?

1. Explain the importance of working capital in terms of liquidity and short-term solvency position of a firm. 2. What do you understand from working capital? What are its different forms? 3. Net working capital is much useful in taking decisions', do you agree with the statement? Comment and justify. 4. "Working capital is two-edged sword, its excessive and deficit availability are equally bad". Comment and justify your answer with appropriate examples. 5. What are the different factors affecting the requirements of working capital?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter12: Corporate Valuation And Financial Planning

Section: Chapter Questions

Problem 6Q: Suppose a firm makes the following policy changes listed. If a change means that external,...

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Concept explainers

Cost of Debt, Cost of Preferred Stock

This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.

Cost of Common Stock

Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity

Question

Output
Figure 9.7: Approaches to Working Capital Policy
←
Financial-Manage...
Working Capital Management || 195
Under a conservative policy, the level of working capital tends to more, as shown
at point C in figure 9.7, at a given level of output. On the other hand, the firms follow
aggressive policy has lesser amount of current assets, as shown at point A in figure 9.7,
in comparison of moderate and conservative policy. A moderate approach may be said
as balanced approach.
The third step of working capital management, involves control of each current
assets, e.g., cash management, inventory management, bills receivable, debtors'
management. We have already discussed some ratios in respect of inventory and
debtors, e.g., inventory turnover ratio, debtor's turnover ratio and collection period etc.
Inventory, and cash management further includes various topics e.g., economic order
quantity, store ledger, cash budget etc. These are not discussed here due to limited
syllabi requirement.
Review Questions
1. Explain the importance of working capital in terms of liquidity and short-term
solvency position of a firm.
2. What do you understand from working capital? What are its different forms?
3. Net working capital is much useful in taking decisions', do you agree with the
statement? Comment and justify.
4. "Working capital is two-edged sword, its excessive and deficit availability are
equally bad". Comment and justify your answer with appropriate examples.
5. What are the different factors affecting the requirements of working capital?
Enumerate.
6. Illustrate the importance of working capital for a new manufacturing firm.
7. How are net working capital, liquidity, technical insolvency and risk related?
8. Briefly explain the essentials of sound working capital management.
9. Describe working capital management, and explain different approaches to
finance working capital requirements.
10. List down the type of industries those, according to your understanding, follow
working capital approaches: (i) conservative, (ii) aggressive, (iii) zero working
capital approach.
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