A popular theory for managing risk to the firm that arises out of its management of working capital involves following the principle of self-liquidating debt.

A popular theory for managing risk to the firm that arises out of its management of working capital involves following the principle of self-liquidating debt. Discuss how this principle applies to each of the following situations.

 

Applewood Homes owns a chain of senior housing complexes and is presently debating whether it should borrow short or long term to raise $5 million in needed funds. The funds are to be used to expand the firm’s care facilities, which are expected to last 10 years.

XYZ Chemicals needs $2 million to purchase inventory to support its growing sales volume. They do not expect the need for additional inventory to diminish in the future.

HomeBake is making financial plans for the coming year and expects that during the months of November through January it will need an additional $5 million to finance the seasonal expansion in inventories and receivables.

Directions:

 

Discuss the concepts, principles, and theories from your textbook. Cite your textbooks and cite any other sources if appropriate.

Your initial post should address all components of the question with a 600-word limit.

Learning Outcomes

 

Appraise the determinants of net working capital.

Defend a firm’s cash conversion cycle.

Question the benefits and costs of short-term credit.

Readings

 

Required:

 

Chapter 15: Working-Capital Management in Foundations of Finance

Chapter 17: Cash, Receivables, and Inventory Management in Foundations of Finance

Bugshan, A. (2022). Oil price volatility and corporate cash holding. Journal of Commodity Markets, 28(9), 100237.

Recommended:

 

Chapter 15 PowerPoint Slides

Chapter 17 PowerPoint Slides

Bagais, O. A., & Aljaaidi. K.S. (2021). Financial ratios in energy projects: The case of days sales of inventory. Journal of Project Management, 57–60.

A popular theory for managing risk to the firm that arises out of its management of working capital involves following the principle of self-liquidating debt.

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