Homework Answers
PART 2
Temporary working capital refers to the working capital requirement over and above the permanent working capital to meet the seasonal demands or any other situation.
Hence , the temporary working capital for Q4 will be:
Temporary working capital = Net working capital requirement for Q4- Permanent working capital = 23-13 = $ 10 million
PART 3
According to Matching Principle (also called hedging approach) , the permanent working capital and fixed assets should be financed with long term sources of funds and the temporary working capital should be financed with short term sources.
In the given scenario, we should finance the permanent working capital requirement of $13 million using long term sources of funds
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Emerald City Umbrellas sells umbrellas and rain gear in Seattle, so its sales are fairly level across the year. However, it is branching out to other markets where it expects demand to be much more variable across the year. It expects sales in its new market of: Q1 Q2 950.000 Q3 $10,000 Q4 D $49.750 Sales $19.500 It carries inventory equal to 22% of next quarter's sales, has accounts payable of 11% of next quarter's sales, and accounts receivable of...
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