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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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Accounts Payable Turnover Period: The accounts payable turnover period of 37 days exceeds the credit period of 21 days. This indicates that the company is taking longer to pay its suppliers, which can hurt relationships with them and potentially lead to payment issues.
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Current Ratio: The current ratio of 1.5:1 is below the industry average of 2.5:1. This suggests that Gigabyte Computers may struggle to cover its short-term liabilities with its short-term assets, indicating potential liquidity problems.
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 Ajax Computers Ltd could implement is the introduction of a just-in-time (JIT) inventory system. This approach would help reduce excess inventory costs and minimize storage costs. By aligning purchasing with production schedules, the company can ensure that stock levels are optimized, thus freeing up cash that can be reinvested for operational needs or improvements.
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 selling its assets can have several implications:
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Financial Implications: The immediate cash inflow from selling assets can strengthen Ajax Computers' balance sheet. However, it also means losing any future income generated by Gigabyte, potentially impacting long-term financial stability.
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Employee Impact: This decision can lead to significant job losses, affecting employees' livelihoods and morale. There may also be negative public relations consequences, affecting Ajax’s reputation in the market.
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Supplier Relationships: Suppliers may be adversely affected by the closure, resulting in lost business opportunities and strained relationships. This may lead to difficulties in sourcing raw materials in the future.
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Market Reaction: The market may react negatively to such a closure, leading to a decrease in stock prices and investor confidence.
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Opportunity Costs: Selling off assets could also eliminate potential revenue streams and savable sectors of the business that could have been turned around with the right management.