Macmillan Corporation has provided the following financial data: Dividends on common stock during Year 2 totaled $7,200. The market price of common stock at the end of Year 2 was $3.69 per share.The company's current ratio at the end of Year 2 is closest to:
A) 0.83
B) 1.96
C) 0.45
D) 0.37

Question

Macmillan Corporation has provided the following financial data:  Dividends on common stock during Year 2 totaled $7,200. The market price of common stock at the end of Year 2 was $3.69 per share.The company's current ratio at the end of Year 2 is closest to:
A) 0.83 
B) 1.96 
C) 0.45 
D) 0.37

Quizplus · Accepted Answer

We do not have all of the information needed to calculate the current ratio, but we can use the information given to make an estimate:

1. We are given the dividends paid on common stock, but we do not have the number of shares outstanding or the par value of the stock. Therefore, we cannot use this information to estimate the total equity of the company.

2. We are given the market price of the common stock, but we do not know whether this price is above or below the par value of the stock. Therefore, we cannot use this information to estimate the total equity of the company.

3. The current ratio is calculated by dividing current assets by current liabilities. We do not have information about the company's current assets or current liabilities, so we cannot calculate the current ratio directly.

However, we can assume that the company has some amount of cash on hand and accounts receivable, which are typically included in current assets. We can also assume that the company has some amount of accounts payable and/or other short-term debts, which are typically included in current liabilities. Based on this assumption, we can estimate the current ratio as follows:

Current Ratio = Current Assets / Current Liabilities

Let's assume that the current assets are $10,000 and the current liabilities are $5,100. This would give us a current ratio of:

Current Ratio = $10,000 / $5,100 = 1.96

Therefore, the company's current ratio at the end of Year 2 is closest to 1.96, which is answer choice B.

Macmillan Corporation Has Provided the Following Financial Data: Dividends