Answer:
b. The transactions would lower Safeco's financial strength as measured by its current ratio but raise Risco's current ratio
Explanation:
The formula to compute the current ratio is shown below:
Current ratio = Total Current assets ÷ total current liabilities
So,
For Safeco, the current ratio would be
= $20 million ÷ $10 million
= 2 times
And for Risco, the current ratio would be
= $10 million ÷ $20 million
= 0.5 times
After borrowing, the current ratio would be
The current assets and the current liabilities would be increased by $10 million in each side.
For Safeco, the current ratio would be
= $30 million ÷ $20 million
= 1.5 times
And for Risco, the current ratio would be
= $20 million ÷ $30 million
= 0.67 times
By comparing the current ratio, we get to know that The Safeco current ratio would be decreased whereas, the Risco current ratio is increased
Hence, option b is correct
