What will be the effect of transaction, Financial Econometrics

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A company's current assets are less than its current liabilities. Company issues new shares at full market price.

What will be the effect of this transaction upon company's working capital and on its current ratio?

Working capital           Current ratio

A                     Increase                       Increase

B                     Constant                      Increase

                   Constant                      Decrease

                   Decrease                      Decrease

Solution:

The answer is A.

The cash balance will increase, which means there is more working capital. Current ratio will increase as there are more current assets than current liabilities.


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