Finance case study - Assignment Example

1996 1997 Cash and marketable securities $ 5142 $ 3230 Accounts receivable $ 50,092 $ 51,432 Inventory $ 82,096 $ 83,097 Liquidity ratio means a firm’s ability to meet current liabilities out of its current assets. Liquidity ratios are procession or short term financial procession of a firm. This ratio reflects the short term solvency of a business. SDI’s liquidity ratio is good. 2) Based on the analysis of historical data the bank can lend the requested money to the SDI. It is preferable to grant a credit of $9,500,000 to SDI because the liquidity ratio of SDI is strong. 3) Pro forma financial statements of 1996 and 1997 1996 1997 Cash and marketable securities $ 5142 $ 3230 Accounts receivable $ 50,092 $ 51,432 Inventory $ 82,096 $ 83,097 Current assets: Land, buildings $42,953 $42,953 Accumulated depreciation $ 13,202 $ 17, 218 Net fund assets Total assets $ 193485 $ 197930 Liabilities and equity Short term bank loans Accounts payable $ 22400 $ 23316 Accruals $ 12,907 $ 10960 Current liabilities $ 35307 $ 34276 Long term bank loans $16,248 $16248 Mortgage $ 2000 $ 2000 Long term debt $ 18,248 $ 18,248 Total liabilities $ 88862 $ 86800 Common stock (700000 shares) $ 33750 $ 33750 Retained earnings $ 20,101 $ 20,101 Total equity $ 53851 $ 53851 Total liabilities and equity $ 142713 $ 140651 4) The optimal cash balance is 5 percent of sales.

Yes, SDI will be able to invest in marketable securities in 1996 and 1997. 5) On the basis of forecasts developed, SDI has the ability to retire all of its shirt term outstanding loans by Dec. 13, 1996 When the bank decides to withdraw the entire line of credit and to demand immediate repayment of two existing loans extended to SDI, the alternatives would be to search some other sources of financing especially public financing. Line of credit is defined as “Rather than grant individuals or businesses many small loans, banks offer qualifying customers lines of credit, unsecured amounts of money from which a borrower can pull money to help cover any expenses.

The maximum amount allowed to be borrowed, as well as other terms such as interest rates and repayment options are determined in advance. Borrowers use money from a line of credit at any time without having to apply and wait for approval of a traditional loan.” (Schnotz 2011). 6) Under the circumstances, an analysis of the comparative ratio of SDI reveals that it is sustainable. 6) a). Short term loans will be repaid when sufficient cash is available, without reducing the liquidity of the firm below the minimum requirements set by the bank b).

SDI will reinstate its cash dividend, set at 25 per cent of earnings, in the year during which all short term loans and credit lines have been paid in full 10) SDI’s performance is critically dependent upon the financial performance of 1996 and 1997. 11) On the basis of the analysis Ingrid should recommend that banks extend the existing short and long term loans and grant an additional $ 9,500,000 loan. It is better to impose collateral security by banks. Works Cited Schnotz, Wilhelm. What Is a Line of Credit?. eHOW. 2011. Web.

8 Mar 2011. .