8. Financing strategies.
The managerial balance sheet of the three firms can be directly constructed from the data with
Firm A Firm B Firm C
Invested capital
Capital employed
It follows that:
Firm A Firm B Firm C
[Short-term debt – Cash]
Firm A has an excess of long-term financing of $25 after funding its net fixed assets, which is exactly
Firm B has an excess of long-term financing of $25 after funding its net fixed assets, which is exactly
Firm C has an excess of long-term financing of $15 after funding its net fixed assets of $50, which is
9. The financial effect of the management of the operating cycle.
a.
Working capital requirement (WCR) = Accounts receivable + Inventories + Prepaid expenses
– Accounts payable – Accrued expenses
December 31, 2008:
3-1
December 31, 2009:
December 31, 2010:
b.
Managerial balance sheets
in thousands December 31,
2008
December 31,
2009
December 31,
2010
Invested capital
December 31, 2010:
Note that net short-term financing (NSF) went up drastically from December 31, 2008, to December 31,
2010. In the third year, the firm’s financing strategy changed from a matching one to a very aggressive
NSF can increase only if the firm’s net long-term financing (NLF) decreases, and/or its working capital
requirement increases. It is clear from the data that the change in the financing strategy was triggered by
d.
Pro forma working capital requirement (WCR)12/31/10
Accounts receivable12/31/10 =
days30
365
salesNet
$2,597 days30
365
$31,600
Inventory 12/31/10 =
$3,138 8
100,25$
Accounts payable12/31/10 =
days33
365
sinventorieinChangesoldgoodsofCost
days33
365
Purchases
¿$25,100+($3,138−$3,200)
365 ×33 days=$2,264
Working capital requirement = Accounts receivable + Inventories + Prepaid expenses
– Accounts payable – Accrued expenses
Pro forma managerial balance sheet
3-3
in thousands
December 31,
2010
Invested capital
Payment period days =
180/]sinventorieinChangesoldgoodsofCost[
payableAccounts
180/Purchases
payableAccounts
June 30, 2009
Collection period days =
180/655,10$
953,1$
= 33 days (rounded)
Inventories turnover =
986,1$
2940,8$
= 9.0
Payment period = 29 days (given)
December 31, 2009
Collection period days =
180/851,13$
616,2$
= 34 days (rounded)
Inventories turnover =
6942
267111
,$
,$
= 8.7
=
694,2$
671,11$
= 8.7
Payment period
180/)]986,1$694,2($671,11[$
950,1$

180/]708$671,11[$
950,1$
3-5
180/379,12$
950,1$
June 30, 2010
Collection period days =
180/720,11$
100,2$
= 32.3 days (rounded)
Inventories turnover =
085,2$
2834,9$ x
= 9.4
Payment period
180/)]694,2$085,2($834,9[$
650,1$

180/)]609($834,9[$
650,1$
180/225,9$
950,1$
b.
Managerial balance sheet
in thousands
June 30,
2009
December 31,
2009
June 30,
2010
Invested capital
Cash
$ 160
$ 60
$ 70
Working capital requirement (WCR)
((WC(WCR)
2,471
3,288
2,422
Net fixed assets
733
818
830
Total invested capital
$3,364
$4,166
$3,322
Capital employed
Short-term debt
$ 50
$ 880
$ 50
Long-term financing
3,314
3,286
3,272
3-6