Question

Looking forward to next year, if Chester’s current cash balance is $17,478 (000) and cash flows from operations next period are unchanged from this period, and Chester takes ONLY the following actions relating to cash flows from investing and financing activities:
Issues 100 (000) shares of stock at the current stock price
Issues $400 (000) in bonds
Retires $10,000 (000) in debt

Which of the following activities will expose Chester to the most risk of needing an emergency loan?

A. Pays a $5.00 per share dividend
B. Purchases assets at a cost of $25,000 (000)
C. Sells $10,000 (000) of their long-term assets
D. Liquidates the entire inventory

Answer 1

Answer:

Purchase of assets at a cost of $25,000,000 will expose the company most to the risk of needing emergency loan.

The correct answer is B

Explanation:

The first two options are outflows that will reduce the liquidity position of the company. Payment of $5.00 dividend per share costs the company $500,000 while purchase of assets costs the company $25,000,000. Since the purchase of assets costs the company a higher outflow, thus, it will expose the company most to the risk of needing emergency loan.