Question

Suppose that at year-end 1999 Executive Paper had unused lines of credit which would have allowed it to borrow a further Php300 million. Suppose also that it used this line of credit to raise short-term 4 loans of Php300 million and invested the proceeds in marketable securities. Would the company have appeared to be a. More or less liquid? (Provide at least 3 ratios) b. More or less levered? (Provide at least 3 ratios)

Answer 1

a. The company's liquidity must have increased as there is an increase in Current Assets and Current liability in the same amount.

Ratios:

Earlier Current Ratio = CA/CL

New Current Ratio = (CA+300mn)/(CL+300mn) > CA/CL

Earlier Quick Ratio = (CA-Inventory)/CL

New Quick Ratio = (CA-Inventory+300mn)/(CL+300mn) > (CA-Inventory)/CL

Earlier Cash Ratio = Cash and Cash Equivalent/CL

New Cash Ratio = (Cash and Cash Equivalent+300mn)/(CL+300mn)

b. With the addition of PHP300mn, the leverage has also improved as it has increased the current liability and total debt with equal amount.

Ratios:

Earlier Debt-Equity Ratio = Total Debt/Total Equity

New Debt-Equity Ratio = (Total Debt+300mn)/Total Equity

Earlier Debt Capitalization Ratio = Total Debt/(Total Debt+Total Equity)

New Debt Capitalization Ratio = (Total Debt+300mn)/(Total Debt+300mn+Total Equity)

Earlier Equity Multiplier = Total Asset/ Total Equity

New Equity Multiplier = (Total Asset+300mn)/ Total Equity