Working Capital Management Techniques Used to Better Companys Position - Example

344030 - Finance - Problems 7-21 Surgical Tools, Inc., of Illinois Cost in Korean Won Pre-tax profit 1,006,500,000 Korean taxes (28%) 281,820,000 Profit after taxes 724,680,000 dividend 362,340,000, Profit after Dividend 362,340,000 License Fee 362,340,000 Profit / Loss 0 Cost in US$ Profit after taxes 540,000 dividends 270,000 Profit after Dividend 270,000 tax on license fee(34%) 91,800 net profit 178,200 9-21 Adams Corporation In $ terms Cash Dividend of $10 m Cash Dividend of $ 5m Earnings 20,000,000 20,000,000 Dividend 10,000,000 5,000,000 earnings after Dividend 10,000,000 15,000,000 Income taxes (30%) 3,000,000 4,500,000 earnings after taxes 7,000,000 10,500,000 in Brazilian terms R$ Earnings 52,000,000 52,000,000 Dividend 26,000,000 13,000,000 earnings after Dividend 26,000,000 39,000,000 Income taxes (15%) 3,900,000 5,850,000 earnings after taxes 22,100,000 33,150,000 Coverting to US$ $8,500,000 $12,750,000 Since pofit comes out to be greatest using the Braziailian R$ when $5m are remitted, this option should be used. (Answer) 4-22 Hong Kong Tool company EBIT x Sales = ROIC Yr1 Yr2 Yr3 EBIT 7,530 9,190 15,210 Sales 171,275 187,500 244,900 ROIC DUPONT FORMULA:- ROI=Net Profit after tax/ Sales * Sales/ Total Assets * Total assets/ Equity NP after tax/ sales 0.02715 0.02770 0.03097 Sales/ TA 2.125 2.282 2.498 Total assets/ Equity 2.08 2.097 2.335 ROI 12.003% 13.26% 18.06% 5-22 Quinlan Company -What working capital management techniques might Quinlan use to better its position vis-�-vis this particular customer? Working capital management refers to how the short-term balance of current assets and current liabilities are managed against each other.; the focus lies on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers) which in this case is 60 days.. The level of working capital is intimately related to the flow of cash into and out of the business.Quinlan would need enough working capital to setup the business, pay operating costs, and continue to operate until payment arrives 60 days later. An alternative could be the use of short-term financing such as a line of credit (LOC) to make emergency purchases or to bridge the gap between month's-end payables and receivables. An LOC can be negotiated with Quinlan's financial institution, and this should be done before any need actually arises. Large asset purchases such as equipment and real estate should be financed long-term which allows the firm to spread the payments over the average life of the assets. It is also advisable to make a cash flow budget which could be done using a bookkeeper, accountant, accounting software or even spreadsheets downloadable from the Internet. This would help anticipate inflows and outflows of money over a period of time. Budgeting thus allows one to see when a cash crunch is likely to occur. 4-23 Sun Microsystems Annualized percentage all-in-cost in euros Discount Euro 7000 Acceptance fee Euro 7000 Total cost Euro 14000 Annualised cost Euro 56000 Annualised cost (%) 08% 5-23 Sun Microsystems a- What are the U.S. dollar net proceeds received at once from discounted trade acceptance in alternative 1? US$ 693000 b- What are the U.S. dollar net proceeds received in three months in alternative 2? Euro 698,250 *1.02= $712,215 c- What is the break-even investment rte that would equalize the net U.S. dollar proceeds from both alternatives? 27.45% d- Which alternative should Sun Microsystems choose? It should choose alternative 2 7-23 Hollywood Entertainment a- What is the annualized percentage all-in-cost of this factoring alternative? 18% b- What are the advantages and disadvantages of the factoring alternative compared to the alternatives in Hollywood Entertainment Factoring allows a company to raise finance based on the value of its outstanding invoices. Factoring also gives it the opportunity to outsource its sales ledger operations and to use more sophisticated credit rating systems. The major advantage of factoring is that the beneficiary receive the majority of the cash from debtors within 24 hours rather than a week, three weeks or even longer. At the same time, the factor issues statements on the firm's behalf and collects payments. The factor also provides regular reports on the status of the company's sales ledger There are many advantages to factoring, which generally include: Cash flow is maximised as factoring enables the firm to raise up to 80% or more on its outstanding invoices. Using a factor can reduce the time and money one spends on debt collection since the factor will usually run the firm's sales ledger for it as well. Hollywood Entertainment would also be able to use the factor's credit control system to help assess the creditworthiness of new and existing customers - this is especially useful if it does a lot of business with companies whose turnover is lower than �1 million and who do not have to file full returns with Companies House. Factoring can be an efficient way to minimise the cost and risk of doing business overseas. Disadvantages Similarly, there are disadvantages to factoring as well. Unless carefully implemented, factoring can have a negative impact on the way a business operates. The factor usually takes over the maintenance of the sales ledger. Customers may prefer to deal with the company it is trading with rather than a factor. However, if the factor's techniques are clearly agreed beforehand, there will usually be no problem. Factoring may impose constraints on the way to do business. For non-recourse factoring, most factors will want to pre-approve customers, which may cause delays. The factor will apply credit limits to individual customers (though these should be no lower than prudent credit control would suggest). The client company might only want the finance arrangements and yet it might feel it is paying for collection services they do not really need. Ending a factoring arrangement can be difficult where the only exit route is to repurchase the sales ledger or to switch factors and that could cause a sudden shortfall in your working capital. Bibliography Articles for Entrepreneurs. Bank Credit Lines Sources of Finance Factoring. 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