Working Capital Management:
Applegate Bicycle Company is trying to devise an aprópiate working capital policy. Their most recent balance sheet is as follows: Balance Sheet, December 31, 20X5 (in thousands)
Assets Liabilities and Owner's Equity
Cash $ 30 Accounts payable $35
Accounts Receivable 50 Notes payable 10
Inventories 30 Accruals 5
Current Assets $110 Current Liabilities $50
Net fixed assets 150 Mortgage loan (at 13%) 80
Common equity 130
Total liabilities and
Total assets $260 owner's equity $260
You know that net profits in 20X5 were $28,000.
1) What is Applegate's current level of working capital?
2) What percentage of total assets is invested in working capital?
3) Calculate Applegate's return on investment (ROI).
4) Suppose the firm reduces cash, accounts receivable, and inventory by 10% and uses the proceeds to pay off some of its accounts payable. Now, assuming all other items remain the same, answer a, b, and c above using these new figures. What has happened? What warning would you offer?