Current ratio & capital budgeting decisions
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Explain current ratio, discuss it implications, and describe a good current ratio if it's too high or too low explain reasoning; and describe how businesses make capital budgeting decisions.
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Solution Summary
Current ratio and capital budgeting decisions are analyzed. The implications and reasons of how businesses make capital budgeting decisions are made is analyzed.
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Current ratio is the relationship between current assets and current liabilities. It is calculated to show the safety of current
debt holders claims in case of default.
Current ratio: Current Assets/ current Liabilities.
In general, the higher the ratio, the better is the position of the debt holders. The lenders would feel that they have a good cushion against drastic losses of value in case of business failure. Excessive current assets over current liabilities seems to help protect claims in case inventories have to be liquidated and should accounts receivable involve sizable collection problems.
But on the other side, excessively high current ratio ...
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