Finance

Lawrence Sports Simulation

Learning Team B

Corporate Finance

FIN/571

Lawrence Sports Simulation

The purpose of this paper is to create at least three alternative working capital policies that allow Lawrence Sports to reduce future difficulties. Followed by making recommendations on the type of capital policy Lawrence Sports should follow. Lawrence Sports is a $20 million dollar company that specializes in manufacturing and distributing sports equipment. Lawrence Sports uses a small list of suppliers that include Gartner Products and Murray Leather works. Their largest customer based on revenue dollars is Mayo stores.

The first step in valuing a business is analyzing the historic performance. Historical performance analysis should focus on evaluating the risk associated with the recommendations. In this case, it means analyzing Lawrence sports liquidity, accounts receivable, inventory turn, and looking beyond the numbers for intrinsic value.

The goal of working capital management is to maximize shareholder wealth. One way to do this is to avoid negative net present value decisions and seek positive net present value projects (Emery, Finnerty, & Stowe, 2007). Creating shareholder value starts by analyzing a company’s cash flow. In this textbook example, Lawrence Sports’ mixed stream of positive and negative cash flows represent the company’s ability to generate revenue.

One way to improve the overall cash balance and the need to go to external markets to receive cash is to dollar cost average the procurement of supplies. By dollar cost averaging the supplies the company will smooth the inflow and outflow of cash. Smoothing out the cash flow is ideal because it means that the firm does not need to take advantage of the financial institutions unfavorable hurdle rates. The money saved by avoiding the unfavorable financing terms can be plowed back into the company and used to support operations.

Net working capital is an...