Getting A Loan From The Bank

Accounting Data:

Ratio Firm A Firm B
Current Ratio 1.2 1.6
Debt Ratio 0.2 0.5
Asset Turnover 2 6
Quick Ratio 1.1 0.9
TIER 2 5
Inventory Turnover 7 1
Accounts Receivable Turnover 1 5
P/E ratio 15 20

Question


Which of two firms would find it easier to get a loan from the bank?

a) Can't say for sure given the available data
b) Firm A since the debt ratio is smaller
c) Firm B since the TIER is larger
d) Firm B since the quick ratio is smaller

Answer


a) Can't say for sure given the available data

Explanation


When looking at which firm would find it easier to get a loan from the bank, there are two ratios to consider: debt ratio and the TIER. A firm with a smaller debt ratio and a larger TIER would be the one to find it easier to get a loan. Since firm A has the smaller debt ratio and the smaller TIER and firm B has the larger debt ratio and the larger TIER, it is not possible to say for sure, given the available data, which of the two firms would find it easier to get a loan from the bank.

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