(Analyzing the risk-return tradeoff) CL Marshall Liquors owns and operates a chain of beer and wine shops throughout the Dallas–Fort Worth metroplex. As a result of the rapidly expanding population of the area, the firm requires a growing amount of funds.

Historically, it has reinvested earnings and borrowed using short-term bank notes. Balance sheets, in thousands, for the last five years are as follows:

a. Compute the firm’s current ratio (current assets divided by current liabilities) and debt ratio (current plus long-term liabilities divided by total assets) for the fiveyear period found above. Describe the firm’s risk using both the current ratio and the debt ratio.

b. Alter the financial statements above so that current liabilities remain constant at $50 and long-term liabilities increase in the amount needed to meet the firm’s financing requirements. Compute the firm’s current ratio (current assets divided by current liabilities)
and debt ratio (current plus long-term liabilities divided by total assets) using the revised financial statements you have prepared for the five-year period above.
Describe the firm’s risk using both the current ratio and the debt ratio.

c. Which of the financing plans is more risky? Why?

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2012 2013 2014 2015 2016 Current assets $100 $130 $160 $190 $220 Fixed assets 250 270 290 310 330 Total Assets $350 $400 $450 $500 $550 Current liabilities $50 $90 $130 $170 $210 Long-term liabilities 100 100 100 100 100 Owners' equity 200 210 220 230 240 Total liabilities and owners' equity $350 $400 $450 $500 $550