The Acme Corporation has been acquired by the Conglomerate Corporation. To help
ID: 2761528 • Letter: T
Question
The Acme Corporation has been acquired by the Conglomerate Corporation. To help finance the takeover, Conglomerate is going to liquidate the overfunded portion of Acme’s pension fund. The assets listed below are going to be liquidated. Listed are their face values, liquidation values today, and their anticipated liquidation values one year from now (their fair market values).
Calculate the one-year liquidity index for these securities. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))
Asset FaceValue Current
Liquidation
Value One-Year
Liquidation
Value IBM stock $15,000 $14,900 $15,500 GE bonds 6,000 3,000 3,400 Treasury securities 20,000 15,000 19,000
Explanation / Answer
Solution:
Computation if liquidity index I = (Individual stocks face value /Total value)*(t0/t1) for all the three stocks
= (15000/41000)(14900/15500) + (6000/41000)(3000/3400) + (20000/41000)(15000/19000)
=.352 + .129 + .385
= 0.87 is the liquidity index- explanation below.
The liquidity index measures the amount of potential losses suffered by a company from sale of assets compared to a fair market value established under the conditions of normal sale. The lower is the index, the less liquidity the DI has on its balance sheet. The index should always be a value between 0 and 1.
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