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LPC Law Notes Finance and Capital Markets Notes

Ratios Justifying A Persons's Concerns Notes

Updated Ratios Justifying A Persons's Concerns Notes

Finance and Capital Markets Notes

Finance and Capital Markets

Approximately 204 pages

A collection of the best Capital Markets and Loans* notes the director of Oxbridge Notes (an Oxford law graduate) could find after combing through dozens of LPC samples from outstanding students with the highest results in England and carefully evaluating each on accuracy, formatting, logical structure, spelling/grammar, conciseness and "wow-factor".

In short, these are what we believe to be the strongest set of Capital Markets and Loans notes available in the UK this year. This collection is...

The following is a more accessible plain text extract of the PDF sample above, taken from our Finance and Capital Markets Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

A Question asking you to consider a D’s or S’holder Concerns and whether they are justified ones

Step 1:

Find the Current Ratio

Is a direct comparison of current assets with current liabilities. I measure the assets which can be turned into cash relatively readily in order to meet liabilities which must be paid within 12 months. The result is expressed as a ratio:

__Current assets__ : 1

Current liabilities

So if the current assets are 40,000 and the current liabilities are 20,000, the current ratio will be :

40,000 = 2:1

20,000

  • A ratio of 1:1 would mean that the business has exactly 1 of current assets with which to meet every 1 of current liabilities. Most business would expect to have a higher ratio, say 1.5:1.

Step 2:

Find the Acid Test

The Current ratio takes into account all of the current assets. Closing stock may not be quickly saleable. The Acid Test is the ratio between current liabilities and current assets excluding stock (or work in progress in a non-trading business). The Acid Test Ratio omits stock from current assets because of the difficulty in converting stock into cash quickly.

Current Assets – Closing Stock : 1

Current Liabilities

Prepayments form the current assets figure are also excluded as these represent amounts already paid by the business, their very nature means that they cannot usually be converted back into cash.

Current Assets
Stock (Work in progress/prepayments) 65,000
Debtors +50,000
Cash +5,000
= 120,000
Current Liabilities
Creditors 40,000
Accruals +10,000
= <50,000>
Net Current Assets 70,000

The Acid Test is: 120,000 – 65,000 = 1.1:1

50,000

An acid test of 1:1 means that the business has 1 of readily liquid assets for every 1 of current liabilities. The lower the ratio, the greater the risk of the business being unable to meet its debts as they fall due. However, even a high ratio needs to be considered critically. The business may not be pursuing its debtors rigorously, or may not have written off sufficient bad debts.

  • We want a 1:1 minimum, meaning you can meet liabilities

  • This test removes assets that may not materialise

Step 3:

Difficulty in Paying Debts?

  • Look at the balance sheet to compare Cash to Short Term Trade Creditors and ask whether it has difficulty in paying its debts. Look mainly at the configuration of the Balance Sheet

  • Question:

    • Bad debts

    • Perishable stock

    • Work in progress amount could be over-inflated

    • Debtors figure could be over-inflated

Step 4:

Impact of the BB on the Net Assets

  • Profit/Loss Reserve = reduced

  • Cash = reduced

  • This would damage the ratios further, meaning that liquidity could be a bigger problem

Step 5:

Are Concerns Justified?

  • Always apply to the facts (Not getting a potentially Hostile/conflictive 3rd party might be good)

  • Ds Must have regard to s.172(1)(act in Best interest of the Co.))(Look at Director’s Duties Notes)

  • It might be good for the Co. that the leaving Partner is leaving as he is not happy/ is irresponsible and thus the Co. may be more stable as Ds will have more freedom to make decisions/flow

  • We might be getting a good deal, they asked for 1 million and we actually sold them for 500k

  • Remember that Balance Sheet is only a snapshot of one day

  • What are the future prospects?

  • E.g. concerns are justified because with the low-level of liquidity following a decrease in cash to X, there would be pressure placed if all the money went on a buy-back

Step 6:

...

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