Chapter 15 - 1SP

(Risk-return trade-off) CI. Marshall Liquorsowns and operates a chain of beer and wineshops throughtout the Dallas-Forthworth metroplex. The rapidly expanding population of the area has resulted in the firm requiring a growing amount of funds. Historically, the firm has reinvested earnings and borrowed using short-term bank notes balance sheets for te last 5 years are found below.

	2011	2012	2013	2014	2015
Current Assets	$100	$130	$160	$190	$220
Fixed Assets	250	270	290	310	330
Total	$350	$400	$450	$500	$550
Curent Liabilities	$50	$90	$130	$170	$210
Long-Term Liabilities	100	100	100	100	100
Owner's Equity	200	210	220	230	240
Total	$350	$400	$450	$500	$550

a) Compute the firm's current ratio (current assets divided by currnt liabilities) and the firm's debt ratio (current plus long-term liabilities divided by total assets) for the 5-yea period found above. Describe the firm's risk using both the current ratio and debt ratio.

b) Alter the financial statements above such 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 the firm's debt ratio (current plus long-term liabilities divided by total assets) using the revised financial statements you have prepared for the 5 year period 2011-2015. Describe te firm's risk using both the current ratio and debt ratio.

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