Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
B) Company A has greater leverage than Company B.
C) Company A has less leverage than Company B.
D) Company A and Company B have roughly equivalent enterprise values.

Question

Quizplus · Accepted Answer

Company A has a working capital of $1 billion ($42 billion - $41 billion), while Company B has a working capital of $0.9 billion ($2.7 billion - $1.8 billion). Despite Company A having a higher absolute amount of working capital, the ratio of current assets to current liabilities (a key indicator of the ability to meet short-term obligations) is much higher for Company B (1.5) than for Company A (approximately 1.02). This suggests Company B is more likely to have sufficient working capital to meet its short-term needs compared to Company A, making statement A incorrect.

Company a Has Current Assets of $42 Billion and Current