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8. Due to poor financial management (capex funded by short term debt and operating cash flow), a firm finds itself in a liquidity bind. There is no cash nor further room on the short-term line of credit to pay over-due suppliers who are threatening legal action. Profitability is very good and leverage (vs. peers) is quite modest. Despite the mistake, the bank has confidence in the operational skills of management and likes the industry's market prospects. A sensible solution to the problem is: * Sell assets to raise cash to pay ST creditors Negotiate special terms from suppliers seeking payment deferrals Re-finance fix assets with a term loan using proceeds to boost liquidity Improve A/R collections to generate more cash
Expert Solution
The company in the current senerio can use a combination of tecniques to meet its liquidity crunch like:
a. Option B: The company can negotiate the special terms of payments to creditors. Like it can negotiate a plan whereby they can take the approval of the creditor and can ask them to convert the payments due to a short term loan with the interest payments.
b. Option C: Since the capex wher short term financed and the cash flows were distorded since the same were taken on a short term loan. Thus we can take a new loan from the banks on the Capex as refinancing way and can us=tilise those assets as an means to met the current financial crunch.
c. Option D: The company can also improve its collection days and can reduce the debt recovery period. Thus can generate cash flow in the short term.
Option A is not recomdable since the capital assets are an intergral part and are used to generate revenue for an organisation. thus the organisation should nit focus on sellings its fixed assets.
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