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Ajax Computers Ltd is considering making a takeover bid for a controlling block of shares in Gigabyte Computers Ltd - HSC - SSCE Business Studies - Question 22 - 2003 - Paper 1
Question 22
Ajax Computers Ltd is considering making a takeover bid for a controlling block of shares in Gigabyte Computers Ltd. The financial report obtained from Gigabyte Comp... show full transcript
Worked Solution & Example Answer:Ajax Computers Ltd is considering making a takeover bid for a controlling block of shares in Gigabyte Computers Ltd - HSC - SSCE Business Studies - Question 22 - 2003 - Paper 1
Step 1
Outline TWO indicators of problems with effective cash-flow management experienced by Gigabyte Computers Ltd.
Answer
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High Accounts Payable Turnover Period: Gigabyte Computers has an accounts payable turnover period of 37 days, which exceeds the credit period of 21 days. This indicates that the company is taking longer to pay off its suppliers, potentially leading to strained supplier relationships and possible cash flow issues.
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Increased Inventory Turnover Days: The inventory turnover period has risen from 27 days to 35 days, indicating slower sales or increased stock levels. This can tie up cash in unsold inventory, further complicating cash-flow management.
Step 2
Explain ONE strategy that Ajax Computers Ltd could implement to improve the profitability of Gigabyte Computers following the takeover.
Answer
One effective strategy would be the introduction of a Just-in-Time (JIT) inventory system. This approach minimizes inventory holding costs and reduces excess stock. By ordering goods only as they are needed in production or sales, Ajax Computers can reduce storage costs and improve cash flow. Additionally, this strategy would enhance responsiveness to market demand, potentially increasing profitability.
Step 3
Analyse the implications of closing down Gigabyte Computers Ltd and selling off its assets valued at $1.75 million.
Answer
Closing down Gigabyte Computers Ltd and liquidating its assets carries several implications:
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Financial Impact: Selling the assets for $1.75 million provides immediate liquidity but may fail to reflect the true value of the company over the long term, especially if it has growth potential.
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Employee Considerations: Such a move would likely lead to significant job losses, adversely affecting employee morale and local employment rates. This could also damage Ajax Computers' reputation as an employer.
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Stakeholder Relations: The decision could upset current stakeholders, including suppliers and creditors. They may worry about receiving payments, negatively impacting their operations as well.
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Market Position: Closing Gigabyte could allow competitors to capture its market share, which can harm long-term profitability for Ajax.
Overall, while liquidating assets can offer short-term financial relief, it poses substantial risks for Ajax Computers' positioning and ethical responsibilities.