Questions 1. Liquidity ratios Aa Aa Most firms borrow money to finance some of t

Question

Questions 1. Liquidity ratios Aa Aa Most firms borrow money to finance some of their assets, and most will choose to borrow some long-term funds and funds. Which group some short-ternm of lenders would put greater emphasis on a firm's liquidity ratio when evaluating a potential borrower? O Long-term lenders O Short-term lenders The most recent data from the annual balance sheets of Pellegrini Southern Inc. and Scramouche Opera Company are as follows: Balance Sheet December 31st (Millions of dollars) Scramouche Pellegrini Scramouche Pellegrini Southern Inc. Southern Opera Company Opera Company Inc. Assets Current assets Current liabilities Cash Accounts receivable Inventories $2,296 840 2,464 5,600 $1,476 Accounts payable $0 506 2,869 3,375 4,125 7,500 $0 540 Accruals 1,584 Notes payable 3,600 Total current liabilities Total current assets Net fixed assets Net plant and equipment 2,700 2,700 3,300 6,000 Long-term bonds 4,400 4,400 Total debt Common equity Common stock Retained earnings 1,625 875 2,500 10,000 1,300 700 2,000 8,000 Total common equity Total assets 10,000 8,000 Total iabilities and equity

Explanation / Answer

1) Group of lender's putting greater emphasis on liquidity ratio: *Short-term lenders 2) Pellegrini Southern Inc.'s current ratio is 3600/2700 = 1.3333, and its quick ratio is (1476+540)/2700 = 0.7467; Scramouche Opera Company's current ratio is 5600/3375 = 1.6593, and its quick ratio is (2296+840)/3375 = 0.9292. 3) True statements: *Scramouche Opera Company has a better ability to meet its short-term liabilities than……………. *If a company's current liabilities are increasing faster……………………………………. *If company has a quick ratio of less than 1 but a current ratioof more than 1 and if the difference………….

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