4 discussion reply, 100 words each
songsongsong
db_6.docxDiscussion 1:
Felicia & Fred recently hired a new designer who has considerable experience in product development of handbags and small leather goods. The intent was for the designer to initially work with the company’s innovation team to introduce a gift with purchase (GWP): a logo wristlet purse that can accommodate a smartphone. This GWP will be offered as a limited edition during the holiday season and customers or recipients will be encouraged through social media to participate in a survey regarding the product to determine future potential demand for handbags and other small leather goods bearing the Felicia & Fred logo.
The potential inclusion of handbags as part of the company’s product will require significant addition to the total value of Felicia & Fred’s working capital. The entire mix of assets and liabilities as part of the balance sheet might change.
Consider the following:
Name three working capital elements that may change as a result of expansion into a new product line. Indicate why this element of working capital will change. What types of transactions will be either increased or initiated as a result of taking on this endeavor?
In order to maintain the company’s debt covenants, it must maintain a current ratio of 1.5. Its current ratio is presently 1.75 and has been maintained at that level for some time. What happens to a company’s current ratio if it takes on additional short-term debt or accounts payable to fund current assets when the current ratio is greater than one? Less than one?
Given your consideration of the part 2 result, should the company fund a working capital increase with short-term debt or long-term debt?
REPLY 1: (100 WORDS)
Name three working capital elements that may change as a result of expansion into a new product line. Indicate why this element of working capital will change.
The three main elements that will all change as a result of an expansion into a new product line are cash, inventory and accounts payable. Cash will change as a result of the increase in COS and sales of the new product. The inventory will also change as an additional product and the GWP is added to the product line. Accounts payable changes because there will be additional costs associated with developing, storing and marketing the new handbags.
What types of transactions will be either increased or initiated as a result of taking on this endeavor?
Felicia & Fred will need to either increase debt to fund the expansion or initiate any trade credits from the designer and developer of the handbag. Consideration should also be given to inventory management for such a limited time offer. The company would not want to run out of supplies of the GWP nor would they want to hold an excess inventory of the item since it is a limited time offer.
What happens to a company’s current ratio if it takes on additional short-term debt or accounts payable to fund current assets when the current ratio is greater than one? Less than one?
A company’s current ratio includes current assets/current liabilities which means that a ratio above 1 indicates the company can pay its current liabilities with its current assets. If the company takes on short-term debt it will decrease their current ratio, however if they can keep it above the 1.5 then taking on short-term debt is an option. If the current ratio is less than 1 it shows that the company may have an issue meeting its short-term obligations.
Given your consideration of the part 2 result, should the company fund a working capital increase with short-term debt or long-term debt?
The company has some flexibility utilizing the short-term debt and since this initial expansion is to determine potential demand for handbags etc., funding it with short-term debt makes some sense.
REPLY 2: (100 WORDS)
Hi Class,
The change in working capital is the difference in the net working capital of a firm from one accounting period to the next one. Their goal is to decrease the amount held in this account in order to reduce the need to bring in additional funds. Fred and Felicia are thinking of expanding their product line once again, this time with handbags. To do this expansion, the firm will need to find a way to increase their net working capital without putting too much strain on the firm’s finances. One way expansion into a new product line will change the NWC is inventory planning. Fred and Felicia will have to purchase the additional materials needed to create these handbags. By doing so, they will have to increase cash used as well as increasing inventory investment. Another cause that will change NWC is through accounts payable payment period. Fred and Felicia may be able to lengthen the payback period required for purchasing the additional materials needed, leaving them with a higher cash flow. A third cause of changes in NWC would be more stringent collection policies. A more aggressive approach to collecting account receivables will increase cash flows as well.
Fred and Felicia’s current ratio is 1.75. This number is a liquidity ratio that measures a firm’s ability to pay long and short term obligations. To find the current ratio, divide the firm’s current assets by its current liabilities. A higher ratio indicates good financial health. If the current ratio is under 1, the firm has more liabilities than assets and suggests that the firm may have trouble repaying its debts. On the other hand, a ratio over 3 may also indicate poor financial health within the firm. This says to potential investors that the company may not be using its current assets efficiently. The ideal current ratio for any firm is between 1.5 and 3. If Fred and Felicia decide to take on additional debt, their current ratio will decrease. With their current ratio at 1.75, they should be able take on additional debt to expand the firm.
I recommend Fred and Felicia fund a working capital increase with short-term debt as the current ratio deals with current assets and liabilities. By using short-term debt, the payback period is considerably less and allows for an increase in NWC as soon as the debt is paid in full. The less time the firm takes to do this, the better off Fred and Felicia will be for their next expansion.
Thanks,
Tia
Ref:
http://www.accountingtools.com/questions-and-answers/what-causes-a-change-in-working-capital.html
Discussion 2:
This story details the bond market reaction to an improvement in the economy:
The Government Bond Market Is Nervous That the Recovery Is Real (http://business.time.com/2012/03/15/the-government-bond-market-is-nervous-that-the-recovery-is-real/)
What characteristics of the bond market make it so reactive to an economic upswing? How does the world economy factor into this reaction? What is your opinion on this issue? Read other stories about this event and offer your opinion on what will happen with the bond market.
REPLY 1: (100 WORDS)
Class,
The bond market is a low-risk environment that one can by an investment for the return of future interest gained and the principle that was put in. If you could invest in a guaranteed return over a period of time, would you? It sounds like a great idea and it is, but there are forces that can affect the yield and other aspects.
The bond market pays over a period of time and keeps a steady stream on income flowing to the investor, but one major force of economics affects it the greatest, inflation. Inflation is how much buying power a currency has and, “Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. Put simply, the higher the current rate of inflation and the higher the (expected) future rates of inflation, the higher the yields will rise across the yield curve, as investors will demand this higher yield to compensate for inflation risk.” (Neilson 2016) and this means that if inflation goes up, the value of the bond goes down.
Another economic force that affects the Bond Market is interest rates. Since the Fed produces the baseline for interest rates, if that interest rate goes up, it will increase the rates for the Bond and vise versa. This, depending on the maturity of the bond, longer-term bonds will be affected more than Bonds with shorter maturity times.
In todays economy there is a prediction that the Fed will increase the Fed Fund rate and by doing that people who invest during that time could receive a better rate when purchasing. There is also the prediction that inflation will rise and that could make decrease the purchasing power of the yield over time.
The basic idea is that Bonds are a better purchase when the economy is on a slump, but when it rises, there could be a risk of loosing out on purchasing power as inflation and interest rates rise. I think it is still a good purchase for the long term, because it still brings in a steady stream of income to the investor.
Ansel
Nielsen B. (2016 March) Understanding Interest Rates, Inflation And Bonds | Investopedia http://www.investopedia.com/articles/bonds/09/bond-market-interest-rates.asp#ixzz4RbooEufo
REPLY 2: (100 WORDS)
references;
What is inflation and how should it affect my investing? retrieved from; http://www.investopedia.com/ask/answers/156.asp
What impact does inflation have on the time value of money? retrieved from; http://www.investopedia.com/ask/answers/042415/what-impact-does-inflation-have-time-value-money.asp
Thank you,
Brian
