Working Capital Management
Problem: 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.
Question 1: What is Applegate's current level of working capital?
Question 2: What percentage of total assets is invested in working capital?
Question 3: Calculate Applegate's return on investment (ROI).
Question 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?