MGT201 - Financial Management GDB NO.1 due date November 22, 2018

Topic : Analysis of Financial Statments

Discussion Question:

Working capital management is a crucial task for the companies to maintain short term liquidity of their business. It includes management of all constituents of working capital and ignorance of any element can cause serious liquidity issues. Changes in one of these elements affect the overall working capital of the company. Cargo Intel has to pay Rs. 250,000 to its creditors without sacrificing the liquidity. Company also aims to make payment to creditors without increasing the current liabilities. Among various measures of liquidity ratio; management has decided to use “Quick Ratio” as a measure of liquidity. Company has following two options to make payment to creditors:

Option 1. Using cash of Rs. 150,000 and selling marketable securities of Rs. 100,000 for the payment to creditors (NOTE: ignore profit or loss on sale of marketable securities)

Option 2. Taking short term loan of Rs. 220,000 and selling marketable securities of Rs. 30,000 for the payment to creditors (NOTE: ignore profit or loss on sale of marketable securities)

Following information has been extracted from financial statements of the company for the current year:

Particulars	Rs.
Cash	600,000
Fixed assets	4,000,000
Short term debt	300,000
Marketable securities	170,000
Account receivables	630,000
Creditors	710,000
Inventory	400,000
Accruals	75,000
Long term loan	500,000
Machine and equipment	8,000,000

You are required to calculate:

1. Quick ratio before using any option
2. Quick ratio for option 1
3. Quick ratio for option 2

Which option you will suggest considering the stated objectives of the company. Support your selection with reasoning.

Note:

Calculations are mandatory for all parts, avoid irrelevant details otherwise marks will be deducted.

Important Instructions:

• Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB.
• Your discussion must be based on logical facts.
• Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
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For Detailed Instructions, please read the GDB # 01 announcement.

Best of Luck!!