Question

Answer the following questions:
(a) You are put in charge of managing your firm’s working capital. Your firm has
$ 100,000 in extra cash on hand and decides to put it in a savings account
7% interest. How much will you have in your account in 12 years assuming
that banks pays interest annually i.e (compounding) interest payments accrues
annually.
(b) Your grandma wants to know exactly what an acid-test ratio is. Please explain
in simple terms what above ratio is and why it is useful.

Answer 1

a)

Extra cash = 100000

Interest offered = 7%

Period of deposit = 12 years

The account compounds annually,

After 12 years account value = Deposit amount*(1+interest rate offered)^period of deposit = 100000*(1+0.07)^12 = 225219.1589

b)

The acid-test ratio is a financial ratio that gives an idea about the liquidity of a company i.e. whether the company has sufficient short-term highly liquid assets to cover its short-term liabilities. Highly liquid assets are those which can be converted into cash easily, which excludes inventories.

If the acid test ratio is much lesser than the current ratio then it implies the company has a substantial amount of inventory and highlt dependent on it. If acid-test ratio is >1 tht means company dosen't need to sell its inventory to repay its short term debts.