Reference no: EM132745467

Problem 1: Brodax has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so each plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? Justify your choice with logical arguments.

a. The transaction would improve both firms' financial strength as measured by their current ratios.

b. The transactions would raise Broadax's financial strength as measured by its current ratio but lower Smaland's current ratio.

c. The transactions would lower Brodax 's financial strength as measured by its current ratio but raise Smaland's current ratio.

d. The transaction would have no effect on the firm' financial strength as measured by their current ratios.

e. The transaction would lower both firm' financial strength as measured by their current ratios.