Need the answer for this one Managing to the bankers\' ratios has gotten many co

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Need the answer for this one

Managing to the bankers' ratios has gotten many company executives into trouble. Perhaps the best example comes from a French consumer goods company whose CEO announced in 2001 with considerable pride, "Our working capital has increased from 1 million to over 4 million with our current ratio rising from 110% to 200% and the quick ratio rising from 35% to 100%." The company declared insolvency six months later a. The higher current and quick ratios meant there was a large amount of capital tied up in receivables and inventory. Th high for the company to maintain those large amounts. That could be why they went bankrupt 6 months later e company's cost of invested capital could have been too b. The higher quick ratio meant the company did keep higher inventory levels, but there were not enoug That could be why they went bankrupt 6 months later h receivables to repa y their loans in the event of distress to the company c. The higher current ratio meant there were not enough receivables and inventory to repay their loans in the event of distress to the company. That could be why they went bankrupt 6 months later

Explanation / Answer

As Current Ratio is the ratio of sum of invetory, receievables, cash and marketable securities to Current liabilities, a higher current ratio could be well because of large receivables and inventory and doesn't need to be necessarily cash or marketable securities. This can project favorable working capital scenario. Similarly Quick ratio is ratio of sum of cash, marketable securities and receivables to the current liabiilities and a substantially large receivables can paint a favorable picture for quick ratio, However, the reality can be entirely different. As large amounts of capital is blocked in receivables and inventory, to remain solvent the company needs to have enough cash flows to service interest obligations , however due to poor receivable collection and cash tied in inventory the cost of invested capital especially debt burden could have too high for the firm to remain solvent.

Hence Option A is the right answer.

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