Safeco's Current Assets Total to $20 Million Versus $10 Million

question 28

Multiple Choice

Safeco's current assets total to $20 million versus $10 million of current liabilities,while Risco's current assets are $10 million versus $20 million of current liabilities.Both firms would like to "window dress" their end-of-year financial statements,and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts.Which of the statements below best describes the results of these transactions?

• A)The transactions would improve Safeco's financial strength as measured by its current ratio but lower Risco's current ratio.
• B)The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio.
• C)The transactions would have no effect on the firm' financial strength as measured by their current ratios.
• D)The transactions would lower both firm' financial strength as measured by their current ratios.
• E)The transactions would improve both firms' financial strength as measured by their current ratios.

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Definitions:

Weighted Average

A calculation that takes into account the varying degrees of importance of the numbers in a data set.

Weighted Average

A calculation that takes into account the varying degrees of importance of the numbers in a data set, assigning weights to each number before averaging.

Ordinary Shares

Equity securities representing ownership in a company, entitling holders to vote on corporate matters and share in profits through dividends.

Dilutive Securities

Financial instruments that could reduce earnings per share if converted to common stock, such as warrants and convertible bonds.