Finance 515

16-1, Define each of the following terms:

a. Working Capital is a measure of both a company’s efficiency and its short-term financial health. The working capital ratio is calculated as:

Working Capital= Current Assets – Current Liabilities

This ratio indicates whether a company has enough short-term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. A ratio between 1.2 and 2.0 is sufficient.

Net Working Capital cash and short-term assets expected to be converted to cash within a year less short-term liabilities. Businesses use net working capital to measure cash flow and the ability to service debts. A positive net working capital indicates that the firm has money in order to maintain or expand its operations. Net Working Capital tends not to add much to the business’ assets, but helps keep it running on a day-to-day basis.

Current Assets- Current Liabilities

Net Operating Working Capital or NOWC is calculated by taking the current assets required in operations and subtracting non-interest bearing liabilities. NOWC helps assess a company’s liquidity because it looks only at current assets and liabilities required to operate the business. Current assets typically include cash, A/R, and inventories, but exclude marketable securities. Current liabilities typically include A/P and accruals but exclude short-term debt.

b. Relaxed Policy is relatively large amounts of cash, marketable securities, and inventories. A liberal credit policy. Restricted Policy is constrained holding of cash, marketable securities and inventories. Moderate Policy is an investment policy that is between relaxed and restricted policies.

c. Permanent Current Operating Assets are the minimum amount of current assets a company needs to continue operating. Permanent current assets are current assets that are always replaced...