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 five-year 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?

Transcribed Image Text:

2012 $100 250 2013 $130 270 2014 $160 290 2015 2016 Current assets Fixed assets Total Assets Current liabilities Long-term liabilities Owners' equity Total liabilities and owners' equity 5350 $190 $220 330 S350 S400 450 S500 550 $170 $210 100 240 $400 $450 S500 $550 310 $50 100 200 $130 $90 100 210 100 230 100