In: Finance
Assume that a corporation needs to enter the private debt market to raise funds for plant expansion. The corporation expects debt covenants to place restrictions on the levels of its current ratio and total-liabilities-to-assets ratio. Considering the accounts that comprise these ratios, provide examples of accounting estimates, accounting judgments, and structured transactions that the lender should examine closely and explain why each is important. In replies to peers, discuss additional information the lender should consider
CURRENT RATIO:
100,000 of current liabilities and only
20,000 of current assets. Then the company current ratio will be
0.2. As you can see the company has enough current assets to pay
off 20 percent of his current liabilities. This shows that company
is highly leveraged and highly risks. Bank would prefer a current
ratio of atleast 1 or 2 . so that all the current liabilities would
be cover by the current assets.TOTAL LIABILITIES TO ASSETS RATIO: