la Gear was a company that manufactured fashion footwear. It designed glamorous workout shoes and casual footwear, and used glamorous models to market its products. Its rise was meteoric. In 1988, it was ranked number three on Business Weeks list of best small companies. In 1989, it was the top performing company on the New York Stock Exchange (NYSE) and was valued at over $1 billion. The company was able to cater successfully to the demands for fashion excesses of the 1980s, but it failed to predict the more austere lifestyle trends of the early 1990s and suffered massive losses.

The company was able to fund operating losses by sale of marketable assets. By managing its working capital and selling excess inventories, it kept going for a number of years. Despite strict loan covenants and large losses, the company was able to survive for a considerable length of time due largely to the liquidity of its asset base. LA Gears highly liquid asset structure enabled it to meet its debt obligations despite falling revenues.

Although in the case of LA Gear the high degree of asset liquidity did not save it from the ultimate collapse in 1998, DeAngelo et al., (2002) who researched the company conclude that asset liquidity is beneficial and is able to give a company management time to implement a successful turnaround. A high degree of asset liquidity, particularly the ability to liquidate working capital might enable a company to survive financial difficulties for a considerable length of time.

ANSWER THE FOLLOWING

1.Explain the significance of having asset liquidity in times of financial distress.

2.Explain how the company was able to survive for a number of years despite heavy losses.

3.Explain why it is important for a lender to have good knowledge of the industry in which a borrowing company operates

4.Explain the primary reason for the decline in the sales of LA Gear in the 1990s.

(please answer it within 4 hours)