Chief financing officer of Company RR, a speciality coffee manufacturer, is re-thinking about its working capital policy and wants to re-new its line of credit and it wouldn’t ready to build payroll, probably forcing the company out of business. The scare has forced the company to examine carefully about each component of working capital to make sure it is required, and decide whether the goal is to determine the line of credit are often eliminated entirely. Previously, it has done little to look at assets and mainly because of poor communication among business functions and the decisions about working capital cannot be made at vacuum. Characters in the case: Company RR and, Person J. To discuss: The way person X will distinguish between a relaxed but rational assets policy and a situation within which a firm merely has excessive current assets because it is inefficient and whether company RR working capital policy is appropriate or not.

Question

How can one distinguish between a relaxed butrational working capital policy and a situation inwhich a firm simply has excessive current assetsbecause it is inefficient? Does RR’s working capitalpolicy seem appropriate?

Answer 1

Question

Chapter 16, Problem 2MC

Summary Introduction

Case summary:

Chief financing officer of Company RR, a speciality coffee manufacturer, is re-thinking about its working capital policy and wants to re-new its line of credit and it wouldn’t ready to build payroll, probably forcing the company out of business.

The scare has forced the company to examine carefully about each component of working capital to make sure it is required, and decide whether the goal is to determine the line of credit are often eliminated entirely.

Previously, it has done little to look at assets and mainly because of poor communication among business functions and the decisions about working capital cannot be made at vacuum.

Characters in the case:

Company RR and,

Person J.

To discuss: The way person X will distinguish between a relaxed but rational assets policy and a situation within which a firm merely has excessive current assets because it is inefficient and whether company RR working capital policy is appropriate or not.

Expert Solution & Answer

Trending nowThis is a popular solution!

See solution

Check out sample textbook solution

Students have asked these similar questions

How can one distinguish between a relaxed butrational working capital policy and a situation inwhich a firm simply has excessive current assetsbecause it is inefficient? Does RR’s working capitalpolicy seem appropriate?

Many firms still use the internal rate of return rule instead of net present value. When used properly, the two rules lead to the same decision, but the internal rate of return rule has several pitfalls that can trap the unwary.Explain with reasons, THREE (3) pitfalls of using the internal rate of return rule in appraising capital investment.

What are the likely effects of a policy in which a company fails to adjust for difference in risk when estimating the cost of capital for their various projects?