If a Company Has a Current Ratio of 1

question 128

Short Answer

If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?

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Definitions:

M&M Proposition II

A theory in corporate finance that suggests the cost of equity increases with higher debt levels, keeping the company's value unchanged if taxes are not considered.

Financial Risk

The hazard of suffering financial loss through an investment or business endeavor.

Business Risk

encompasses the potential for a firm's operational or financial performance to suffer due to internal or external factors, impacting profitability and viability.

Absolute Priority Rule

A principle in bankruptcy proceedings that senior creditors are paid before junior creditors and equity holders.