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How can one distinguish between a relaxed but rational working capital policy and a situation in which a firm simply has excessive current assets because it is inefficient? Does RR’s working capital policy seem appropriate?

Answer :

Answer:

The working capital of company RR is large.

Explanation:

If there is more reduction in risk factor than compared with the profitability factor, then such a policy would be called as relaxed policy. Paradoxically, comparing RR with other firms in industry, it is less profitable. It means that the company RR has more working capital. The working capital of an industry can be calculated by calculating the current ratio, quick ratio, and cash turnover. By calculating such rations, it can be determined that the working capital level of RR is large.

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