bm case
Question 3.6.2
Answer a) year 2 current ratio = 700/300 = 2.33: 1
Year 1 current ratio = 500/200 = 2.5:1
Year 2 acid test ratio = (700-350)/300 = 1.17:1
Year 1 acid test ratio = (500-250)/200 = 1.25:1
Answer b) JKL’s liquidity position is quite good. In, both the years the current asset ratio shows that there is sufficient liquidity/working capital in the firm. For example in year 2 for every 1$ JKL has 2.33 $ of current asset. Though there is a slight fall in the current asset ration compared to year 1, it doesn’t necessarily indicates poor liquidity as a high current asset ratio means that you are not using resources efficiently. You are keeping too much cash, which can be invested back in the business.
The acid test ratio is quite favorable since it exceeds the minimum recommended ratio of 1:1, although there is a slight decrease in the year 2 compared to the year 1.
Answer c) other factors to judge the liquidity position of JKL limited are:
1.The stock of JKL has increased from 250 to 350, which reduces the value of acid test ratio in the year 2. It might be useful to know the stock turnover that is how fast the firm sells its product. A high stock turnover means that the current ratio can be indicative of the firm’s liquidity position.
2. Current liabilities has increased from 200 to 300 in the year 2, which have reduced its liquidity ratio.
3. JKL has increased their cash holding from 50 to 200 in the second year. Thus it might help them to increase their liquidity. However there is an opportunity cost attached to it as this money could have been invested in the business.
Question 3.6.6
Answer a) Debentures are a source of long-term finance (loan) for which interest is paid to the debenture holder. Debenture holders usually don’t have ownership or voting rights in an organization.
Answer b) 250/1000 = 0.25% year 2
250/800 = 0.3125% year 1
Answer c) gearing ratio is long-term liquidity ratio that measures the percentage of firm’s
Answer a) year 2 current ratio = 700/300 = 2.33: 1
Year 1 current ratio = 500/200 = 2.5:1
Year 2 acid test ratio = (700-350)/300 = 1.17:1
Year 1 acid test ratio = (500-250)/200 = 1.25:1
Answer b) JKL’s liquidity position is quite good. In, both the years the current asset ratio shows that there is sufficient liquidity/working capital in the firm. For example in year 2 for every 1$ JKL has 2.33 $ of current asset. Though there is a slight fall in the current asset ration compared to year 1, it doesn’t necessarily indicates poor liquidity as a high current asset ratio means that you are not using resources efficiently. You are keeping too much cash, which can be invested back in the business.
The acid test ratio is quite favorable since it exceeds the minimum recommended ratio of 1:1, although there is a slight decrease in the year 2 compared to the year 1.
Answer c) other factors to judge the liquidity position of JKL limited are:
1.The stock of JKL has increased from 250 to 350, which reduces the value of acid test ratio in the year 2. It might be useful to know the stock turnover that is how fast the firm sells its product. A high stock turnover means that the current ratio can be indicative of the firm’s liquidity position.
2. Current liabilities has increased from 200 to 300 in the year 2, which have reduced its liquidity ratio.
3. JKL has increased their cash holding from 50 to 200 in the second year. Thus it might help them to increase their liquidity. However there is an opportunity cost attached to it as this money could have been invested in the business.
Question 3.6.6
Answer a) Debentures are a source of long-term finance (loan) for which interest is paid to the debenture holder. Debenture holders usually don’t have ownership or voting rights in an organization.
Answer b) 250/1000 = 0.25% year 2
250/800 = 0.3125% year 1
Answer c) gearing ratio is long-term liquidity ratio that measures the percentage of firm’s