Answer :
Final answer:
This detailed answer explores liquidity indicators, reasons to increase a loan, and shareholders' return on equity in financial analysis.
Explanation:
Liquidity Indicators for Serious Liquidity Problems:
- Low Quick Ratio: A quick ratio below 1 indicates potential liquidity issues. If the quick ratio is 0.5 in 2024, it suggests the company may struggle to meet short-term obligations.
- High Net Working Capital Ratio: A negative net working capital ratio, such as -0.2 in 2023, implies more current liabilities than assets, signaling severe liquidity problems ahead.
Reasons to Increase Loan:
- Improving Liquidity: Increasing the loan to elevate the current ratio from 1.2 in 2023 to 1.5 in 2024 enhances short-term solvency.
- Reducing Financial Risk: Elevating the debt-to-equity ratio from 0.6 in 2023 to 0.8 in 2024 can reduce financial risk by making use of leverage.
Shareholders' Return on Equity: If the company's % return on shareholders' equity rose from 15% to 18% in the current year, it implies an improvement in the profitability and efficiency of the firm for its shareholders.
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