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Select Any One Of the Following Options: If you were a banker evaluating proposals from ABC Ltd and XYZ Ltd to extend working capital loans, which of them would you prefer to lend to? The firms are in the same industry and are identical in all ways excepting the following: ABC (Current ratio ? 0.9; Acid Test Ratio - 0.4 ; Days payable - 15 days; Days receivable ? 120 days) ; XYZ (Current ratio ? 0.9; Acid Test Ratio - 0.7 ; Days payable - 30 days; Days receivable ? 80 days) ABC XYZ

Question

Select Any One Of the Following Options: If you were a banker evaluating proposals from ABC Ltd and XYZ Ltd to extend working capital loans, which of them would you prefer to lend to? The firms are in the same industry and are identical in all ways excepting the following: ABC (Current ratio ? 0.9; Acid Test Ratio - 0.4 ; Days payable - 15 days; Days receivable ? 120 days) ; XYZ (Current ratio ? 0.9; Acid Test Ratio - 0.7 ; Days payable - 30 days; Days receivable ? 80 days) ABC XYZ

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Solution

Based on the given information, it would be more preferable to lend to XYZ Ltd. Here's why:

  1. Current Ratio: Both ABC and XYZ have the same current ratio of 0.9. This ratio measures a company's ability to pay short-term and long-term obligations. A ratio under 1 indicates that the company's liabilities are greater than its assets, which is not ideal, but since both companies have the same ratio, there's no advantage for either company here.

  2. Acid Test Ratio: XYZ has a higher acid test ratio (0.7) compared to ABC (0.4). This ratio measures a company's ability to pay off its current liabilities without relying on the sale of inventory. A higher ratio is better, indicating that XYZ is in a better position to meet its short-term obligations compared to ABC.

  3. Days Payable: XYZ takes longer to pay its bills (30 days) compared to ABC (15 days). This means XYZ is able to use the cash on hand for a longer period, which is beneficial for the company.

  4. Days Receivable: XYZ collects its receivables faster (80 days) compared to ABC (120 days). This means XYZ has a shorter cash conversion cycle, which is beneficial for the company as it gets its cash back faster.

Therefore, considering these factors, XYZ Ltd appears to be in a better financial position and would be a safer choice to lend to.

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