Homework: WORKING CAPITAL MANAGEMENT
1. During 2019, Mason Company’s current assets increased by P120, current
liabilities decreased by P50, and net working capital
2.
3.
4.
5.
a. Increased by P70.
c. Decreased by P170.
b. Did not change.
d. Increased by P170.
Ans: D. increase in CA causes an increase in NWC and decrease in CL also
causes an increase in NWC.
During the year, Mason Company's current assets increased by P130, current
liabilities decreased by P60, and net working capital
a. Increased by P70.
c. Decreased by P190.
b. Did not change.
d. Increased by P190.
Ans: D. same explanation with number 1.
It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0.
Its current liabilities are P400,000 and the present current ratio is 2 to 1. How
much is the maximum level of new short-term loans it can secure without
violating the policy?
a. P400,000
c. P266,667
b. P300,000
d. P800,000
Ans: A. CA = 2 * 400,000 = 800,000;
800,000 + X = 1.5(400,000 + X)
800,000 + X = 600,000 + 1.5X
0.5X = 200,000
X = 400,000
A firm's current ratio is currently 1.70 to 1. Management knows it cannot violate
a working capital restriction contained in its bond indenture. If the firm's current
ratio falls below 1.40 to 1, technically it will have defaulted. If current liabilities
are P200 million, the maximum new commercial paper that can be issued to
finance inventory expansion is
A. P80 million.
C. P150 million.
B. P370 million.
D. P280 million.
Ans: C. CA= 200 * 1.7 = 340
340 + X = 1.4(200 + X)
340,000 + X = 280 + 1.4X
60, = 0.4X
X= 150 M
A firm's current ratio is currently 1.75 to 1. Management knows it cannot violate
a working capital restriction contained in its bond indenture. If the firm's current
ratio falls below 1.5 to 1, technically it will have defaulted. If current liabilities are
P250 million, the maximum new commercial paper that can be issued to finance
inventory expansion is
A. P375.00 million.
C. P562.50 million.
B. P125.00 million.
D. P437.50 million.
Ans: B. CA= 250,000 * 1.75 = 437,500
437,500 + X = 1.5(250,000 + X)
437,500 + X = 375,000 + 1.5X
62,500 = 0.5X
X= 125M
This study source was downloaded by 100000836990777 from CourseHero.com on 05-16-2022 01:53:53 GMT -05:00
https://www.coursehero.com/file/69393346/acc414hwcllfdocx/
6. Management of a company does not want to violate a working capital restriction
contained in its bond indenture. If the firm's current ratio falls below 2.0 to 1,
technically it will have defaulted. The firm's current ratio is now 2.2 to 1. If
current liabilities are P200 million, the maximum new commercial paper that can
be issued to finance inventory expansion is
A. P20 million.
C. P240 million.
B. P40 million.
D. P180 million.
Ans. B. CA= 200 * 2.2 = 440
440 + X = 2(200 +X)
440 + X = 400 + 2X
40M = X
7. Iken Berry Farms has P5 million in current assets, P3 million in current liabilities,
and its initial inventory level is P1 million. The company plans to increase its
inventory, and it will raise additional short-term debt (that will show up as notes
payable on the balance sheet) to purchase the inventory. Assume that the value
of the remaining current assets will not change. The company’s bond covenants
require it to maintain a current ratio that is greater than or equal to 1.5. What is
the maximum amount that the company can increase its inventory before it is
restricted by these covenants?
a. P0.50 million
d. P1.66 million
b. P1.00 million
e. P2.33 million
c. P1.33 million
Ans: B. 5M + X = 1.5(3M + X)
5M + X = 4.5M + 1.5X
0.5M = 0.5X
X= 1M
8. MFC Corporation has 100,000 shares of stock outstanding. Below is part of
MFC’s Statement of Financial Position for the last fiscal year.
MFC Corporation
Statement of Financial Position – Selected Items
December 31, 1996
Cash
Accounts receivable
Inventory
Prepaid assets
P455,000
900,000
650,000
45,000
Accrued liabilities
285,000
Accounts payable
550,000
Current
portion,
long-term
notes
65,000
payable
What is the maximum amount MFC can pay in cash dividends per share and
maintain a minimum current ratio of 2 to 1? Assume that all accounts other than
cash remain unchanged.
a. P2.05
c. P3.35
b. P2.50
d. P3.80
Ans: B. CA= 455,000 + 900,000 + 650,000 + 45,000 = 2,050,000
CL= 285,000 + 550,000 + 65,000 = 900,000
2,050,000 – X = 2 * 900,000
X = 2,050,000 – 1,800,000
X= 250,000
This study source was downloaded by 100000836990777 from CourseHero.com on 05-16-2022 01:53:53 GMT -05:00
https://www.coursehero.com/file/69393346/acc414hwcllfdocx/
P250,000 / 100,000 shares = P2.5 cash dividends per share
9. Shaw Corporation is considering a plant expansion that will increase its sales and
net income. The following data represent management’s estimate of the impact
the proposal will have on the company:
Current
Proposal
Cash
P 100,000
P 120,000
Accounts payable
350,000
430,000
Accounts receivable
400,000
500,000
Inventory
380,000
460,000
Marketable securities
200,000
200,000
Mortgage payable (current)
175,000
325,000
Fixed assets
2,500,000
3,500,000
Net income
500,000
650,000
The effect of the plant expansion of Shaw’s working capital will be a(n)
a. Decrease of P150,000.
c. Increase of P30,000.
b. Decrease of P30,000.
d. Increase of P120,000.
Ans: B. CAcurrent= 100,000 + 400,000 + 380,000 + 200,000= 1,080,000
CLcurrent= 350,000 + 175,000= 525,000
WCcurrent= 1,080,000 – 525,000= 555,000
CAproposal= 120,000 + 500,000 + 460,000 + 200,000= 1,280,000
CLproposal= 430,000 + 325,000= 755,000
WCproposal= 1,280,000 – 755,000= 525,000
Effect of expansion= WCproposal – WCcurrent= 525,000 - 555,000=
-30,000 or decrease of 30,000
10. Finan Corporation's management is considering a plant expansion that will
increase its sales and have commensurate impact on its net working capital
position. The following information presents management's estimate of the
impact the proposal will have on Finan.
Current
Proposal
Cash
P 100,000
P 110,000
Accounts payable
400,000
470,000
Accounts receivable
560,000
690,000
Inventory
350,000
380,000
Marketable
200,000
200,000
securities
Fixed assets
2,500,000
3,500,000
Net income
500,000
650,000
The impact of the plant expansion on Finan's working capital would be
A. A decrease of P100,000.
C. An increase of P100,000.
B. A decrease of P950,000.
D. An increase of P950,000.
Ans. C. CAcurrent= 100,000 + 560,000 + 350,000 + 200,000= 1,210,000
CLcurrent= AP only= 400,000
WCcurrent= 1,210,000 – 400,000= 810,000
CAproposal= 110,000 + 690,000 + 380,000 + 200,000= 1,380,000
CLproposal= AP only= 470,000
WCproposal= 1,380,000 – 470,000= 910,000
Effect of expansion= 910,000 – 810,000= 100,000 increase
This study source was downloaded by 100000836990777 from CourseHero.com on 05-16-2022 01:53:53 GMT -05:00
https://www.coursehero.com/file/69393346/acc414hwcllfdocx/
11.
The Herb Salter Corporation is considering a plant expansion that will
increase its sales and net income. The following data represent management's
estimate of the impact the proposal will have on the company:
Current
Proposed
Cash
P 120,000
P 140,000
Accounts payable
360,000
450,000
Accounts receivable
400,000
550,000
Inventory
360,000
420,000
Marketable securities
180,000
180,000
Mortgage payable (current)
160,000
310,000
Fixed assets
2,300,000
3,200,000
Net income
400,000
550,000
The effect of the plant expansion on Salter's working capital will be a(n)
A. Increase of P240,000
C. Increase of P230,000
B. Decrease of P10,000
D. Increase of P10,000
Ans: B. CAcurrent= 120,000 + 400,000 + 360,000 + 180,000= 1,060,000
CLcurrent= 360,000 + 160,000= 520,000
WCcurrent= 1,060,000 – 520,000= 540,000
CAproposal= 140,000 + 550,000 + 420,000 + 180,000= 1,290,000
CLproposal= 450,000 + 310,000= 760,000
WCproposal= 1,290,000 – 760,000= 530,000
Effect of expansion= WCproposal – WCcurrent= 530,000 - 540,000=
-10,000 or decrease of 10,000
12.If the firm was to shift P3,000 of current assets to fixed assets, the firm's net
working capital would _____, the annual profits on total assets would _____, and
the risk of technical insolvency would _____, respectively.
A. increase; decrease; increase C. increase; decrease; decrease
B. decrease; increase; decrease D. decrease; increase; increase
Ans: D. Since the working capital is equals to current assets minus current
liabilities, the shift will cause a decrease in working capital. A decrease in current
assets causes an increase in annual profits because an investment in non-current
assets is more profitable. A decrease in current asset will decrease working capital
and in turn increase the risk of technical insolvency.
13.If the firm was to shift P7,000 of fixed assets to current assets, the firm's net
working capital would _____, the annual profits on total assets would _____, and
the risk of not being able to meet current obligations would _____, respectively.
A. increase; decrease; increase C. increase; decrease; decrease
B. decrease; increase; decrease D. decrease; increase; increase
Ans: C. The shift causes an increase on current assets which increases
working capital which also decrease the risk of not being able to meet current
obligations. The annual profits on total assets will decrease because of the decrease
of investment on non-current asset (fixed asset).
14.If the firm was to shift P2,000 of current liabilities to long-term funds, the firm's
net working capital would _____, the annual cost of financing would _____, and
the risk of technical insolvency would _____, respectively.
A. decrease; decrease; increase C. decrease; increase; decrease
B. increase; increase; decrease D. increase; decrease; decrease
Ans: B. the shift will cause an a decrease in current liabilities which will
increase net working capital and which in turn decrease the risk of technical
This study source was downloaded by 100000836990777 from CourseHero.com on 05-16-2022 01:53:53 GMT -05:00
https://www.coursehero.com/file/69393346/acc414hwcllfdocx/
insolvency. The annual cost of financing would increase because it is much more
expensive to fund long-term funds.
15.The firm would like to increase its current ratio.
This goal would be
accomplished most profitably by
A. increasing current liabilities. C. increasing current assets.
B. decreasing current liabilities. D. decreasing current assets.
Ans: C. increasing the current ratio can both be accomplished by increasing
current asset and decreasing current liabilities but it is much more profitable to
increase current asset because decreasing current liabilities by payment of debts
will decrease in current asset or shifting current liabilities to long-term liabilities will
increase the cost of financing.
Nee
This study source was downloaded by 100000836990777 from CourseHero.com on 05-16-2022 01:53:53 GMT -05:00
https://www.coursehero.com/file/69393346/acc414hwcllfdocx/
Powered by TCPDF (www.tcpdf.org)