Explain why, during a recession, working capital will decline at a slower pace than sales?

Why analyze minority interests on the consolidated income statement?

If you believe that interest rates are going to rise, would you be better off choosing loans that are repayable on maturity or in fixed annual installments?

Why are capitalization factors always greater than 1 ?

Should you discount even if there is no inflation and no risk? Why?

What is the discount factor equal to?

Are initial flows on an investment more often positive or negative? What about for final cash flows?

On what should you base a choice between two equal discounted values?

f income is recorded on a company's books on the day it is received (and not on the invoice date) and costs on the date of payment, would this generate working capital? If so, how would this working capital differ from the working capital as calculated today?

1)

During a recession, customers will want a more liberal policy due to decline in the economy. Infact the customers will only buy if they get products/services at higher credit period. This increases Account receivables even when inventory decreases with sales. Therefore  working capital will decline at a slower pace than sales.

2)

We need to analyze the minority interest separately in a consolidated balance sheet because the earnings and losses from the minority interest are not representative of the parent company's operations and hence need to analyzed separately to analyse whether the investment is producing returns or is incurring losses.

3)

If we believe that interest rates are going to rise then we will well of paying loans via fixed installments rater than based on floating rates as would be applicable when repaying on maturity.

4)

Capitalization rate is given by 1/r, where r is stable discount rate. For

Capitalization rate < 1

1/r <1

=> r >1

This means the discount rate needs to be greater than 100% which is not realistically possible as investor doesn't expect 100% return from business every year.

5)

Yes we should discount even if there is no inflation and no risk to account for opportunity cost, i.e, the return it would have generated if invested in next best possible alternative.

6)

Let discount rate be r

 discount factor = 1/(1+r)

7)

Initial flows on an investment more often negative to account for setup cost for the project. Final cash flows are generally positive as it comprises of salvage value and working capital liquidation.

8)

We should base a choice between two equal discounted values based on value of IRR, higher the IRR better the project.

9)

If income is recorded on a company's books on the day it is received (and not on the invoice date) and costs on the date of payment, this could generate working capital if Payables is more than receivables as we are recording here as Account receivable and Payables as zero.

New working capital =  Inventory [This is because Account receivable or payable are not recorded]

Whereas Actual Working capital = Inventory + Receivable(Invoice dated) - Payables(Invoice dated)

Step-by-step explanation

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