I. DLH Mini - case 2:

Short-term and long-term liquidity

Introduction

DLH has, due to the recent performance, assessed their financial situation, including the relationships with their bankers. The management of DLH is naturally concerned about the financial situation of the company, but is also annoyed by their bankers. They do not think that banks have supported their plans, but simply put increased demands and restrictions on the company. Most recently, the management had to ask two funds, the principal shareholders, for subordinated loan capital after pressure from the banks. The management is looking for opportunities to use an alternative bank. The management has consequently established contact with Scandinavian Bank (SB).

As the bank's credit analyst, you are therefore asked to consider the inquiry from the management in DLH. The bank's credit manager has asked you to answer a series of questions in order to assess the credit risk in DLH. It is expected that you draw on your knowledge of DLH, which you have acquired through other analytical work. To answer the questions it would be advantageous if you use the supplied spreadsheets containing financial data for DLH. These accounting data are also available in an appendix to this Assignment.

Assignments 1-4: Measurement of short-term and long-term liquidity risk based on financial ratios

Assignment 1

Calculate short-term liquidity risk for DLH for the years 49. You are asked to base the analysis on the following key ratios:

1. Liquidity cycle

2. Current ratio

3. CFO to short-term debt ratio

End of year balance sheet figures should be applied.

Assignment 2

Calculate long-term liquidity risk for DLH for the years 49. You are asked to base the analysis on the following key ratios:

1. Financial leverage

2. Interest coverage ratio

3. CFO to total debt ratio

4. Capital expenditure ratio

End of year balance sheet figures should be applied.

Assignment 3

Evaluate total liquidity risk in the DLH Group based on your answers to Assignments 1 and 2.

Assignment 4

You are asked to assess the usefulness of financial ratios in measuring short-term and long-term liquidity risk in DLH.

TRUE/FALSE

III. The liquidity risk informs about a firms historical growth rates.

IV. The liquidity cycle measure the average investments on a yearly basis.

V. A strategic value driver is an operational initiative that can be undertaken with the

purpose of creating value

VI. Book value of equity is an important strategic value driver