Working Capital Management for WPRT - Essay Example

Finance and Accounting Question A good dividend policy should maximize owner’s wealth and also ensure adequate financing for the firm. Increased dividends attract shareholders. Therefore, only when manager(s) is sure there will be sustainable increased in earnings should they increase dividend. On the other hand, increasing shareholders dividend should be a watch out since a decrease gets an unfavorable reaction from shareholders. A stable dividend policy is where payment of dividend is consistent. Even if a company experiences a loss it should maintain its dividend since some stakeholders survive on this. Stable dividend also creates a platform for investment of other companies with that particular firm. There is also the regular dividend policy where payment of dividend is at usual term. This is mostly maintained by companies with stable earnings for a long period of time (LEASE, 23). The constant payout ratio implies that the rate of dividend payment is in accordance to the earnings received by the firm. This means that the two are directly proportionate, hence a firm pays dividend according to its ability at that particular time. Irregular dividend policy is where there is uncertainty in the earnings of a company and thus a company cannot operate on regular dividend basis. Besides, the no dividend policy is simply no payment of dividend due to plans for future company expansion and hence need for the funds. West Innovation Inc. (WPRT) is a company interested in creating an environmental friendly (natural gas) engine that performs the same as fuel and with the same price. Since WPRT dividend information is not available, it might mean they have no dividend policy yet. The E.I. du Pont de Nemours and Company (DD) is a science and technology based company that uses stable dividend policy. General Electric Company (GE) a lighting power company that also uses stable dividend policy. This is because their financials show a constant amount paid for a certain period of time. Question 2 Working Capital Management for WPRT, DD and GE Working capital is the firm’s investment in short-term assets such as cash, marketable securities, accounts receivable and inventories. In which net working capital is the difference between current assets and current liabilities. Thus, working capital management is process of utilizing to both short-term assets and short-term liabilities. This is important in order to keep costs to a minimum and to control risks. Considering a company growth over time, then its assets can be decomposed into three categories; fixed assets, permanent current assets and fluctuating current assets. It’s important for a firm to focus much attention on the working capital as they make substantial amount of capital invested in such and also make decision on the mode of financing the firm will adopt. The net working capital for WPRT in 2014 was -$5.94 million which implies that the company’s liabilities exceeded the assets. Thus, the company had low liquidity levels. Similarly, GE Company experienced a decline in working capital in 2014 with a value of -$178 million. This implies that the company’s liabilities exceeds the available assets. This trend is alarming which needs urgent consideration otherwise the company might run out of cash to sustain other operations of the company. Additionally, DD Company has a working capital of $890 million in 2014 which shows that assets exceed liabilities and also improved liquidity position of the company. This is the ideal trend of any company seeking to improve its profitability and also increase its cash holdings. Working capital indicates the liquidity position of a firm and suggests the extent to which working capital is financed and the firm retain enough cash to meet its daily obligations such payment of wages and creditors and also short-term occurring liabilities. Short-term financing is that which is obtained for a period of less than one year usually agreed by the bank, creditors in advance while as long term financing is that which is obtained for a period of more than one year, they are sources such as shares capital, preference shares capital, debentures and long-term borrowing. The management of current assets is similar to that of fixed assets in the sense that in both cases, a firm analyzes their effects on its return and risk. If the firm has large holding of current assets, especially cash, firm’s liquidity position improves (and reduces riskiness), but also reduces the overall profitability. Thus, a risk-return trade-off is involved in holding current assets. The levels of fixed as well as current assets are dependent upon expected sales, but it is only the current assets which can be adjusted with sales fluctuations in the short run. This ensures that the firm has greater degree of flexibility in managing current assets. The cash conversion cycle is the period of time between the point at which cash begins to be used on the production of a product and the collection of cash from a creditor. The connection between investment in working capital and cash flow may be illustrated by means of the cash operating cycle also called leading cycle or working capital cycle. The cash conversion cycle in a manufacturing business equals; The average time that raw materials remain in inventory less the period of credit taken from suppliers plus the time taken to produce goods, plus the time taken by customers today for the goods. If the turnover periods for inventories and accounts receivable lengthen, or the payment period to accounts payable shortens, then the operating cycle will lengthen and the investment in working capital will increase. Cash conversion period = Inventory conversion + Receivables collection - Payables deferral Period. WPRT Cash Conversion Period = 153.66 + 113.23 - 155.79 = 111.10 DD Cash Conversion Period = 133.56 + 44.47 - 81.1 = 96.93 GE Cash Conversion Period = 78.59 + 631.67 – 73.34 = 636.92 The three companies have a positive cash conversion cycle which shows that they more cash at hand. However, GE has the highest value which implies that the company is highly effective in generating more cash at hand compared to WPRT and DD. References LEASE, R. C. (1999). Dividend policy: its impact on firm value. Boston, MA, Harvard Business School Press. Read More