TitmanFinMan12e_Chapter 18_Study Question Solutions

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1、18-3Titman/Keown/Martin•FinancialManagement,TwelfthEditionChapter18SolutionstoStudyQuestions18-1.ThemanagementatDellComputerCorporation(DELL)recognizedearlyinthefirm’shistorythatitcouldimprovecompanyperformancebyfollowingapolicyofminimizingitsinvestmentinnetworkingcapital,(the

2、differenceinthefirm’sinvestmentincurrentassetsandcurrentliabilities).Atthetime,Dell’ssalesweredominatedbyretailcustomerswhousedcreditcardstopurchasecomputers.Thismeantthatthefirm’sinvestmentinaccountsreceivablewasminimal,sothefirmfocuseditsattentiononreducinginventoriesandexpa

3、ndingitsuseoftradecredit,whichisatypeofaccountpayablethatariseswhenonefirmprovidesgoodsorservicestoacustomerwithanagreementtobillthemlater.Dellusedatwo-prongedattack.First,toreduceinventories,DellconvinceditssupplierstoleavetruckloadsoftheitemsthatDellneededatthebackdoorofDell

4、’splants.Thetrucks’contentsbelongedtothesupplieruntiltheywereneededbyDell,atwhichtimeDellmovedtheitemsfromthetrailerstoitsplant.Atthesametime,Dell’smanagementtookfulladvantageofthetradecredittermsbymakingtheirpaymentsatthelatestpossibledate.Incombination,theseactionsnotonlyred

5、ucedbuteliminatedthefirm’sinvestmentinworkingcapital!Withoutthedragofworkingcapitalonfirmperformancethecompany’sprofitssoaredanditsstockpricerosedramatically.18-2.Thesalesforcewillpushforlenientrepaymenttermsasamethodforenticingcustomerstobuythefirm’sproductsandservices.Howeve

6、r,offeringmorelenientpaymenttermswillmeanthatthefirmwillneedtomakealargerinvestmentinaccountsreceivables.18-3.Therationaleforusingthecurrentratioasameasureofliquidityisasfollows:theabilityofthefirmtopayontimeisroughlyrelatedtothefirm’scurrentassets,whicharebydefinitionthoseass

7、etsthatwillbeconvertedtocashwithinoneyearorless.Similarly,thefirm’sdebtsthatmustberepaidoverthecomingyearareincludedinitscurrentliabilities.Therefore,bycomparingthefirm’scurrentassetstoitscurrentliabilitieswegetanindicationofthefirm’sliquidity.18-4.Workingcapitalmanagementenco

8、mpassestheday-to-dayactivitiesofmanagingthefirm’scurrentasset