Hard-up Ltd has a current ratio of 0.75.Its current liabilities amount to $200 000.It borrows $75 000 from a finance company,repayable in five years.
-What is the effect of the loan on the debt-to-equity ratio?
A) There is an increase.
B) There is a decrease.
C) There is no effect.
D) It cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

The current ratio is calculated as Current Assets/Current Liabilities. Therefore, if the current ratio is 0.75, it means that the current assets are only 75% of the current liabilities. When the loan of $75,000 is taken, it increases the current assets, and the new current ratio becomes (current assets + $75,000)/$200,000, which is greater than 0.75. As a result, the increased current assets will also increase the debt-to-equity ratio as the liabilities will increase. Hence, the correct answer is A - There is an increase.

Hard-Up Ltd Has a Current Ratio of 0