Question

In: Finance

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

Solutions

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


Related Solutions

Based on the ion concentrations provided in the table below, which of the following would result...
Based on the ion concentrations provided in the table below, which of the following would result in an EPSP? Select all that apply. Ion Intracellular fluid Extracellular fluid [Na+] 15mM 140mM [K+] 130mM 4mM [Cl-] 5mM 120mM [Ca2+] <0.001mM 1.2mM A) Sodium channels open B) Potassium channels open C) Chloride channels open D) Calcium channels open
From the two companies below, which would you purchase and why based on the following financial...
From the two companies below, which would you purchase and why based on the following financial ratios: Company A   Company B Current Ratio                                     Current Ratio 1.05:1                                                      1.13:1 Debt / Equity Ratio                            Debt / Equity Ratio 50.58%                                           47.36% Gross Profit Margin                             Gross Profit Margin 17.01% 19.82% Return on Common Equity                  Return on Common Equity 13.04% 6.48% Earnings Per Share                             Earnings Per Share $10.61                                            $2.11 P/E Ratio                                          P/E Ratio 9.70                                                12.29
26) In which of the following situations would you prefer to be the lender?
SCENARIO 4. Notation: C = currency; D = demand deposits; T = time deposits; & S = saving deposits. Suppose M1 = C + D; M2 = C + D + T; M3 = C + D + T + S. Suppose also that C = .05D; T = .4D; & S = .3D. The Fed imposes the following reserve requirements: rd = .2; rt = .3; rs = .15. Banks keep the following excess reserve ratios: ed = .05;...
Identify each of the working capital management terms in the table below by placing an “X”...
Identify each of the working capital management terms in the table below by placing an “X” in the box opposite its description. Cash Budget Current Ratio Net Working Capital Spontaneous Liabilities Working Capital Forecasts a firm’s cash inflows and outflows Firm’s current assets Difference between a firm’s current assets and current liabilities The firm’s current assets divided by its current liabilities Current liabilities that grow as the firm grows
Which of the following transactions would cause a firm’s working capital to increase? a. Pay out...
Which of the following transactions would cause a firm’s working capital to increase? a. Pay out $2 million cash dividend. b. Receive $2,500 from a customer who pays a bill resulting from a previous sale. c. Pay $5,000 previously owed to one of its suppliers. d. Borrow $1 million long-term and invest the proceeds in inventory. e. Borrow $1 million short-term and invest the proceeds in inventory. f. Sell $5 million of marketable securities for cash.
Discuss any two key sources of financing a manufacturing firms working capital (4 marks)
Discuss any two key sources of financing a manufacturing firms working capital
Working Capital Management and Capital Budgeting are two functions of the financial manager. Explain which of...
Working Capital Management and Capital Budgeting are two functions of the financial manager. Explain which of these two functions you believe is most important for the financial manager of a small business. (minimum 200 words)
Based on the following information, compute the Working Capital and Current Ratio for both Amazon and...
Based on the following information, compute the Working Capital and Current Ratio for both Amazon and Wal-Mart. Compare your conclusions concerning the liquidity of each company in relation to each other. WAL-MART AMAZON Current Assets $54,975 $17,490 Total Assets 193,406 25,278 Current Liabilities 62,300 14,896 Total Liabilities 117,645 17,521 WORKING CAPITAL CURRENT RATIO DEBT TO ASSET RATIO
The table below presents three samples of data. Which of the following confidence levels would reject...
The table below presents three samples of data. Which of the following confidence levels would reject the null hypothesis that the three population means are equal? Sample 1 Sample 2 Sample 3 7 11 6 5 8 5 7 11 4 6 7 5 6 13 14 6 13 5 6 12 5 6 11 6 8 8 8 9 7 6 7 6 14 9 7 4 8 8 8 8 9 13 9 6 10 8 11 14...
For which of these firms would Modigliani-Miller do the best job of explaining their capital structure...
For which of these firms would Modigliani-Miller do the best job of explaining their capital structure choices?    A firm that only invests in very long term investments     A firm in financial distress     A firm whose choice of projects is heavily influenced by the financing options available to them     A firm whose shares are very inconvenient to buy or sell
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT