CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A company uses 200,000 of cash to repay a short-term bank loan. Before the repayment, its current ratio was 0.80. Which of the following is the most likely effect of the repayment on the current ratio?
The current ratio most likely decreases. With a ratio below 1, current liabilities exceed current assets, so removing the same amount from both takes a proportionally larger share from assets. For instance, 800/1,000 = 0.80 becomes 600/800 = 0.75, a lower ratio.
- AIt decreasesCorrect
- BIt increases
- CIt remains unchanged
Explanation
When the current ratio is below 1, paying down an equal amount of current assets and current liabilities reduces the ratio. Example: 800/1,000 becomes 600/800 = 0.75, which is lower than 0.80. Ratios above 1 would rise instead.
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