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Question: In this case you are playing the role of anewly hired treasury analyst that is tasked with impro...

In this case you are playing the role of a newly hired treasuryanalyst that is tasked with improving the liquidity position andoverall financial management of Firm Y. Firm Y was incorporated 10years ago and operates in the manufacturing industry. Your firsttasks involve benchmarking and forecasting.

To begin your new position, you have been tasked withbenchmarking Firm Y’s liquidity position. In terms of the keyperformance indicators to benchmark, your treasurer states that the“Current and quick ratios provide the best measures of our firm’soverall state of liquidity. In general, higher values for bothindicate that our firm is more liquid. In fact, our recent currentand quick ratios have been lower than our industry peers, so weneed to increase them.”

Based on your understanding of liquidity management, you notethat the cash conversion cycle and its components are critical. Forthis reason you have collected the information that appears inTable 1 (for your firm (Firm Y), Firm A, and the Industry Average).In terms of the comparison reference groups, a two-way comparisonwill be utilized: Firm Y against Firm A (the market leader in themanufacturing industry) and Firm Y against the industry average ofall manufacturers. Firm A is roughly the same age as Firm Y but hassignificantly greater scale. Specifically, Firm A has revenues of$500M, while Firm Y has revenues of $75M.

An intern has assembled the following quantitative informationfor comparison purposes.

Table 2

	DSO	DIO	DPO	CCC
Firm Y	95	40	30	105
Firm A	59	15	35	39
Industry Average	90	50	30	110

Question 1: Assess the treasurer’s statement on using thecurrent and quick ratios to evaluate firm liquidity. Do you agreeor disagree and why?

Question 2: Evaluate and comment on Firm Y’s liquidity positionbased on the DSO, DIO, and DPO and CCC relative to those metricsfor Firm A and the Industry Average.

Question 3: Discuss any foreseeable problems associated with thetwo-way comparisons of the cash conversion cycle (i.e., Firm Y toFirm A or Firm Y versus Industry Average).