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Chapter 3: Q10DQ (page 182)

Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?

Short Answer

Expert verified

Corporate liquidity has been declining since the mid-1960s because the organizations are efficiently managing their resources, selling accounts receivables, and increasing liquidity risk due to finance available at low rates.

Step by step solution

01

Meaning of corporate liquidity

Corporate liquidity refers to the ability of a company to fulfill its working capital requirements. The liquidity is used to determine the efficiency of the management for utilizing its current assets and liabilities.

02

The reason for the decline in corporate liquidity

The corporate liquidity has declined since the mid-1960sisasfollows:

  1. The organizations are efficiently managing the inventory by using methods such as just-in-time inventory and point of sales terminals.
  2. The organization can easily sell its receivables by using securitization of assets.
  3. The organizations are willing to increase their liquidity risk when the interest rates decrease.

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Most popular questions from this chapter

Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?

Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

Esquire Products Inc. expects the following monthly sales:

January

\(28,000

February

\)19,000

March

\(12,000

April

\)14,000

May

\(8,000

June

\)6,000

July

\(22,000

August

\)26,000

September

\(29,000

October

\)34,000

November

\(42,000

December

\)24,000

Total annual sales

\(264,000

Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for \)2 each and produces them for \(1 each. Esquire uses level production, and average monthly production is equal to annual production divided by 12.

d. Construct a cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is \)3,000, which is also the minimum desired.

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

\(100,000

February

\)93,000

March

\(25,000

April

\)25,000

May

\(20,000

June

\)35,000

July

\(45,000

August

\)45,000

September

\(55,000

October

\)85,000

November

\(105,000

December

\)123,000

Total annual sales

\(756,000

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for \)5 per unit and costs \(2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.

Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.

c. Determine a cash payments schedule for January through December. The production costs of \)2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $45,000 per month.

Colter Steel has \(4,200,000 in assets.

Temporary current assets

\)1,000,000

Permanent current assets

\(2,000,000

Fixed assets

\)1,200,000

Total assets

\(4,200,000

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
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