Question 21 (8 points) At the end of 2019, Baby Ltd. faced increasing competition leading to a build up of inventory and declining profitability and liquidity. In an effort to generate more revenue and improve the company's financial position, the management team determined that the best course was to reduce prices and extend generous credit terms that would generate higher sales and cash flow. The results of the initiative are show in the following table: Industry 12% 56% 73% 4.3 Ratio 2019 2020 Profit Margin 9% 7% Gross Profit 55% 50% Margin Debt to Assets 68% 65% Times Interest 6.5 3.7 Earned Current Ratio 2.0 1.6 Accounts Receivable 8.1 5.3 Turnover Inventory 3.2 6.6 Turnover Free Cash Flow $125 $98 (thousands) *Capital expenditures remained unchanged and no dividends were declared. 2.2 6.2 5.0 $127 Using the above information to support your answer, complete the following analysis in your own words: 1. Discuss Baby's liquidity. (2 marks) 2. Discuss Baby's profitability. (2 marks) 3. Discuss Baby's solvency. (2 marks) 4. Conclude on the success of managements initiative and explain the reason for your conclusion. (2 marks) Paragraph v B 1 UA OD tv Answer Part 1 (liquidity discussion); Answer Part 2 (profitability discussion); Answer Part 3 (solvency discussion) I Answer Part 4 (Conclusion