1. Sailboats Etc. is a retail company specializing in sailboats and other sailin

Question

1. Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels Month ($000) Net Income Depreciation Capital Expenditures Levels of Working Capital 4 9.912.3 14.7 24.7 30.3 18.3 1.5 2.8 2.6 4.5 5.1 3.5 0.7 0.4 0.90.1 0.1 0.3 Accounts Receivable Inventory Accounts Payable 2.2 3.5 4.4 4.7 6.7 9.5 6.3 2.6 1.7 4.2 5.4 5.2 4.1 1.8 1.71.71.7 1.7 1.7 1.71.7 a. During which month are the firm's seasonal working capital needs the greatest? b. When does the firm have surplus cash? a. During which month are the firm's seasonal working capital needs the greatest? The month where the firm's seasonal working capital needs are the greatest is month (1) (Select from the drop-down menu.) b. When does the firm have surplus cash? (Select the best choice below.) A. Sailboats Etc. has a surplus cash position in months 1 and 2 only O B. Sailboats Etc. has a deficit cash position in months 1 and 2 only ° C. Sailboats Etc. has a surplus cash position in every month O D. Sailboats Etc. has a deficit cash position in every month

Explanation / Answer

1. Working Capital = Current Assets - Current Liabilities;

Current Assets = Account Receivables + Inventory

Current Liability = Account Payables

Here applying formula:

Working Capital

Thus working capital needs is maximum in Month 0 when WC is 3.1 ( which is least) followed by Month 1 when WC is 3.5. Out of the given options, Option 1(month 1 has max working capital needs as net working capital is lowest)

b) Since the Net Working capital is greater than 0 for all months from 0 to 6 along with a positive (Net income-Depreciation-Capital Expenditure), the firm has surplus cash position across months (Option C).

Month 0 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 2.2+2.6-1.7=3.1 3.5+1.7-1.7=3.5 4.2+4.4-1.7 =6.9 4.7+5.4-1.7=8.4 6.7+5.2-1.7=10.2 9.5+4.1-1.7=11.9 6.3+1.8-1.7=6.4

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