7

7. A bank has a SME customer who is over-trading. While its sales and profit growth are impressively high, the firm’s leverage and liquidity have been consistently eroded and have now reached a danger zone. Generous dividends continue to be paid. The bank is unwilling to extend more credit. The best solution(s) going forward would be: *

a Improve profitability

b Improve asset efficiency by liquidating surplus assets (if any)

c Cut back dividends

d Reduce growth rate or invest growth equity capital

e All of the above

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: *

a Sell assets to raise cash to pay ST creditors

b Negotiate special terms from suppliers seeking payment deferrals

c Re-finance fix assets with a term loan using proceeds to boost liquidity

d Improve A/R collections to generate more cash