Question

A firm has a higher quick (or acid test) ratio than the industry average, which implies:
A) The firm has a higher P/E ratio than other firms in the industry.
B) The firm is more likely to avoid insolvency short run than other firms in the industry.
C) The firm may be less profitable than other firms in the industry.

• A. A and B
• B. B and C
• C. A and C
• D. B and A

Answer 1

Answer: (B)

B and C

Statements B and C are correct.

A) If firm has a higher quick ratio then the P/E ratio might not be necessarily more than other firms in the industry.

B) The firm with higher quick ratio is more likely to avoid insolvency in short run than other firms in the industry as the quick assets are more than current liabilities.

C) The firm will be less profitable then other firms in the industry as its not utilising its debt to the fullest capacity.