Based on the Working Capital table below, which of the following two firms would a lender...

Based on the Working Capital table below, which of the following two firms would a lender view more favorably and why? Show your work.

	Company A	Company B
Current Assets	$ 1,250,000	$ 700,000
Current Liabilities	$ 700,000	$ 200,000
Working Capital	$ 550,000	$ 500,000

Expert Solution

Answer ) Company B

Current Ratio is the "liquidity ratio." It is a measure of the firm's ability to pay its short-term debt. It calculates the assets that must be converted to cash during the year period in order to sufficiently pay the current debt that is owed.

Current ratio= current asset/current liability

For company A

CR= 1250000/700000 = 1.79

For company B

CR = 700000/200000 = 3.5

The one with higher current ratio is more likely to not default the payment as compared to with lower current ratio so the lender will choose company B for less risk consideration

jeff jeffy answered 2 years ago

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