working capital management indicate how this transaction might affect dynamic mattress cash and net working capital: Paying out a $2 million cash dividend
To determine how paying out a $2 million cash dividend might affect Dynamic Mattress's cash and net working capital, we need to understand the concept of working capital and its components.
Working capital refers to the amount of money a company has available to cover its day-to-day operations. It is calculated by subtracting current liabilities from current assets. Current assets include cash, accounts receivable, inventory, and other short-term assets, while current liabilities include accounts payable, short-term loans, and other obligations due in the near future.
Paying out a cash dividend affects both cash and net working capital in the following ways:
1. Impact on Cash: Paying out a $2 million cash dividend reduces the amount of cash available to the company. The cash used for the dividend payment will decrease the cash balance on Dynamic Mattress's balance sheet.
2. Impact on Net Working Capital: Net working capital is the difference between current assets and current liabilities. If the cash dividend payment is funded from cash reserves, it will decrease the current asset of cash. As a result, the total current assets will decrease, potentially affecting the net working capital positively or negatively, depending on the magnitude of the dividend payment compared to other current assets.
If the cash dividend payment exhausts the cash reserves and results in negative cash or inadequate liquidity, it may negatively impact the net working capital. Dynamic Mattress might face difficulties in meeting its short-term obligations if it doesn't have enough current assets like cash or other highly liquid assets to cover its current liabilities.
However, if Dynamic Mattress has sufficient cash reserves and the dividend payment does not significantly impact the overall net working capital, the effect may be minimal or negligible.
In conclusion, paying out a $2 million cash dividend will decrease the cash balance and may impact Dynamic Mattress's net working capital depending on the company's current asset composition and overall liquidity situation.