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). Asset FaceValue CurrentLiquidationValue One-YearLiquidationValue IBM stock $15,000 $14,900 $15,500 GE bonds 6,000 3,000 3,400 Treasury securities 20,000 15,000 19,000 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)) One-year liquidity index

Answer 1

The one-year liquidity index for these securities is 0.862

Step-by-step explanation:

For computing the liquidity index, we have to use the formula which is shown below:

= (IBM stock face value ÷ total amount of face value) × (IBM current liquidation value ÷ IBM one year liquidation value) + (GE stock face value ÷ total amount of face value) × (GE current liquidation value ÷ GE one year liquidation value) + (Treasury securities stock face value ÷ total amount of face value) × (Treasury securities current liquidation value ÷ Treasury securities one year liquidation value)

where,

total amount of face value = IBM stock face value + GE stock face value + Treasury securities face value

= $15,000 + $6,000 + $20,000

= $41,000

Now put these values to the above formula

= ($15,000 ÷ $41,000) × ($14,900 ÷ $15,500) + ($6,000 ÷ $41,000) × ($3,000 ÷ $3,400) + ($20,000 ÷ $41,000) × ($15,000 ÷ $19,000)

= 0.365 × 0.961 + 0.146 × 0.882 + 0.487 × 0.789

= 0.350 + 0.128 + 0.384

= 0.862

Hence, the one-year liquidity index for these securities is 0.862