Ramsey Liquors owns and operates a chain of beer and wine shops throughout the Dallas-Fort Worth 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 the last 5 years are found below.

a. 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) for the 5-year 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 2014–2018. Describe the firm’s risk using both the current ratio and debt ratio.

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

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2014 2015 2016 2017 2018 Current Assets $ 250 $ 325 $ 400 $ 475 $ 550 Fixed Assets 750 800 800 825 875 Total $1.000 $ 125 $1.125 $1.200 $1,300 $1,425 Current Liabilities $ 225 $ 325 $ 425 $ 525 Long-term Liabilities 250 250 250 250 250 Owner's Equity 625 650 625 625 650 Total $1,000 $1,125 $1,200 $1,300 $1.425