In: Business and Management

Submitted By penglingat
Words 905
Pages 4
1. The current ratio is one of the most famous of all financial ratios. It serves as a test of a company's financial strength and relative efficiency. This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. The company in this Case # 1 has relatively high current ratio. It is an indication that the company is liquid and has the ability to pay its current obligations in time and when they become due. Current ratio should be used very carefully because it suffers from many limitations and it should not be used as the sole index of short term solvency. Because it measure only the quantity and not the quality of the current assets and also even if the ratio is favorable, the firm may be in financial trouble, because of more stock or inventory and work in progress which is not easily convertible into cash and therefore firm may have less cash to pay off current liabilities. Management might influence or manipulate also the current ratio by overvaluing the current assets and window dressing.

2. In my opinion as a banker by profession, Rachael makes a very wise decision in buying a common stock taking only out of her savings account. Her investment is risky but all investments carry some degree of it. Risk can come some pain, but also some gain.

Her investment in buying common stock of their company represents the best chance to grow her savings at a rate equal to or greater than the rate of inflation. Common stock has this kind of ability plus the immediate liquidity of trading through recognized exchanges that gives stocks such financial advantages over other stocks. As investor of the company she is working, she has the following rights: Common stock represents proportionate ownership in a company and entitles the holder to a portion of profits as well as liability. She has…...

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