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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

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.

c. Determine a cash payments schedule for January through December. The production costs (\)1 per unit produced) are paid for in the month in which they occur. Other cash payments (besides those for production costs) are $7,400 per month.

Thompson Wood Products has credit sales of \(2,160,000 and accounts receivable of \)288,000. Compute the value of the average collection period.

Question: Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of \(6 per order, and carrying costs of \)2.40 per pipe.

b. How many orders will be placed during the year?

Oral Roberts Dental Supplies has annual sales of \(5,200,000. Ninety percent are on credit. The firm has \)559,000 in accounts receivable. Compute the value of the average collection period.

Antivirus Inc. expects its sales next year to be \(2,500,000. Inventory and accounts receivable will increase \)480,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing
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