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Liquidity & Leverage Problem (With solution included.) (This may be

  1. Dec 28, 2013 #1


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    “Liquidity & Leverage” Problem (With solution included.) (This may be

    Title (doesn't show fully in the actual title):
    “Liquidity & Leverage” Problem (With solution included.) (This may be related to accounting ratios.)

    1. The problem statement, all variables and given/known data
    The problem is attached as TheProblem.jpg, and the solution is attached as TheSolution.jpg.

    2. Relevant equations
    Quick ratio: (Cash and Cash Equivalent + Marketable Securities + Accounts receivable)/(Current Liabilities)

    Equity ratio: (Total Shareholder's Equity)/(Total assets)

    Debt-to-equity ratio: (Total Liabilities)/(Equity)

    Book value: (Total Assets) - (Intangible Assets) - (Liabilities)

    3. The attempt at a solution
    I am trying to do part (v), but I'm not sure I understand how to do it. I don't really understand the answer given either. I have a feeling that it involves analyzing ratios, but I'm not sure about what to do, specifically.

    Any help in getting me to understand how to answer part (v) would be GREATLY appreciated!

    Attached Files:

  2. jcsd
  3. Dec 29, 2013 #2


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    Staff: Mentor

    How is liquidity defined? What values does it take and what do they mean?
  4. Dec 29, 2013 #3


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    Liquidation is an act of exchanging a less liquid asset for a more liquid asset.

    A liquid asset is an asset in the form of money or cash in hand, or an asset which can be quickly converted into cash without losing much value.

    (Liquidity ratio) = (Liquid Assets)/(Short-Term Liabilities), where, if I'm correct, Liquid Assets is defined above, and Short-Term Liabilities is “debt in the immediate present”.

    Is this correct (in the case of the problem I posted)?:
    (Liquidity ratio) = (10 000 + 25 000 + 15 000 + 5 000)/(35 000 + 15 000) = 1.1

    Assuming the above is correct, how do I tie this to the solution given (which says “Liquidity problems; leverage within acceptable limits”)?
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