Question

DUE via ulcau no later than midnight January 19, 2019 Under standard accounting rules, it is possible for a company's liabilities to exceed its assets. When this occurs, the owner's equity is negative. Can this happen with market values? Why or why not? Answer: 4. 5. Could a company's change in NWC be negative in.a siven.vear? (hint, yes). Explain how this might come about. What about net capital spending? Answer Critical Thinking Questions Chapter 3

Answer 1

Equity market value is always greater than or equal to zero as both the share price and the number of shares outstanding can never be negative. Book value can be positive, negative, or zero.

If a company's current assets substantially decrease as a result of a large one-time cash payment, for example, or current liabilities increase due to significant credit extension resulting in an increase in accounts payable, its working capital may turn negative. If the working capital is negative for an extended period of time, it may be a cause of concern for certain types of companies, indicating that they are struggling to make ends meet and have to rely on borrowing or stock issuances to finance their working capital.

Net capital spending is the amount that a firm spends on acquiring fixed assets during the year. It is defined as: Net capital spending = Fixed assets at the end of the year – fixed assets at the beginning of the year + depreciation.

Net capital spending provides an indication of the growth in the company’s fixed assets. An organization that is expanding quickly and needs additional capital assets to sustain its growth will have a high net capital spending figure.