Country : Australia
Assignment Task :

B ackground Briefing Document Elements

  • Determination of the Working Capital Investment and Financing Policies employed by the firm
  • Working capital investment policy is best determined by looking at:
  • The magnitude of current assets and current liabilities, and comparisons between the two.
  • Working capital ratios such as the current and quick (acid-test) ratios and the current to non-current and total asset ratios.
  • Movements and/or trends in these account items or ratios which may inform about a particular policy adoption.
  • Measures of working capital practices such as the changes in key current asset and liability components and combined cash conversion cycle (CCC) outcomes.
  • Application of these indicators and outcomes to the common working capital investment policy categories (conservative, moderate, aggressive).


Working capital financing policy is best determined by looking at:

  • The relationship between the major asset and financing categories, particularly short-term (current) and longer-term (non-current) assets and liabilities, and also in terms of spontaneous, temporary and permanent asset and liability categories (if you can reasonably identify / classify these categories).
  • Ratios such as long-term assets (or PPE) to long-term financing, and temporary and permanent assets to total financing.
  • Movements and/or trends in these accounting items or ratios which may inform about particular policy adoption, and also related elements such as levels and movements in interest and financing costs.
  • Application of these indicators and outcomes to the common working capital financing policy categories (conservative, maturity matching, aggressive).
  • Across both of these policies, consideration of the nature of the company’s activities and any seasonal or cyclical influences, which might impact on their policy adoption or approach taken.


Determination of the capital structure policy employed by the firm

  • Evaluation of the company’s capital structure by examining the major financing components employed by the company, their relative magnitudes and movements in recent years.
  • Examination of common capital structure and leverage ratios and changes in these over time, which might be indicative of a particular capital structure policy being employed and/or a target capital structure level being focused on or moved towards.
  • Whether the company appears to be reliant on particular sources of financing or, similarly, avoids issuing certain sources of finance, and what such observations might imply about capital structure policy.
  • Relationships between changes in capital structure and changes in operating aspects such as profitability, revenue, growth indicators, and what this implies about capital structure policy adoption. Such as the nature of the relationship between profit changes and leverage changes, with a positive relationship being consistent with the trade-off theory and a negative relationship being consistent with the pecking order theory.
  • Relationships between capital structure levels and movements / changes in capital structure and external indicators such as share prices, interest rate levels, credit ratings, ownership structure, international financing markets etc. which might indicate signalling influences from capital structure policy.
  • Application of all of these considerations to the common capital structure stances or policies (irrelevance, trade-off or signalling).

 

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  • Posted on : June 12th, 2019
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