COMPREHENSIVE ESSAY AND DISCUSSION (10 points each) 1. scusss the Working Capita

Question

COMPREHENSIVE ESSAY AND DISCUSSION (10 points each) 1. scusss the Working Capital Financing Policies 2. Site an example of Long- term Financial Management and Discuss its important considerations 3. How does Risk affect your personal investment plan? 4. Explain comprehensively yhte overall goal of financial management - Maximization of Shareholders Wealth 5. Supposed to are a member of company X.s board of directors and chairperson of the company's compensation committee. If a company's board of directors want management to maximize shareholder wealth, should the CEO compensation be set as a fized amount, or shoould the compensation depend on how well the firm performs. If it is to be based on performance, how should perfromance be measured? What factor should your committee consider in setting the CEO's compensation? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stocks intrinsic value? Think of both theoritical and practicall considerations

Explanation / Answer

Answer :-

Working capital financing policy basically deals with the sources and the amount of working capital that a company should maintain.

A firm is not only concerned about the amount of current assets but also about the proportions of short-term and long-term sources for financing the current assets. There are several working capital investment policies a firm may adopt after taking into account the variability of its cash inflows and outflows and the level of risk.

1. Hedging Policy:

One of the policies by which a firm finances its working capital needs is the hedging policy, also known as matching policy. This policy works in an arrangement where the current assets of the business are used perfectly to match the current liabilities.

As per this approach, fixed and permanent current assets are financed through long-term sources and fluctuating current assets are financed through short-term sources.

This policy is a medium risk proposition and requires a good amount of attention. For example, if a bank loan is due to be paid after six months, the company will ensure that sufficient amount of cash will be available to repay the loan on the date of maturity even though it may or may not currently have sufficient cash.

In case of a growth firm, the amount of fixed assets and permanent current asset go on increasing with the passage of time but the volume of fluctuating current assets change with the change in production level.

2. Conservative Policy:

This policy tries to avoid the risk involved in financing of current assets. Here, relatively high proportions of long-term sources are to be used for financing current assets. The firm not only matches the current assets with current liabilities but also keeps some excess amount to meet any uncertainty.

This is the lowest risk working capital policy and fails to ensure optimum utiliza­tion of funds. Hence it cuts down the expected returns of the shareholders.

3. Aggressive Policy:

Aggressive working capital financing policy is a risky policy that requires maximum amount of invest­ment in current assets. Fluctuating as well as permanent current assets under this policy will be financed through short-term debt. In this policy debt is collected on time and payments to the creditors are made as late as possible.

4. Highly Aggressive Policy:

This is a highly risky policy for financing the working capital. As per this policy, even some part of fixed assets is financed through short-term sources. Excessive reliance on short-term sources makes this policy highly risky.

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