Question

Looking forward to next year, if Chester’s current cash amount is $19,378 (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 $2,000 (000) of long-term debt Pays $4,000 (000) in dividends Retires $10,000 (000) in debt. Which of the following activities will expose Chester to the most risk of needing an emergency loan?
a. Purchases assets at a cost of $25,000 (000)
b. Pays a $5.00 per share dividend
c. Liquidates the entire inventory
d. Sells $10,000 (000) of their long-term assets

Answer 1

Answer:

The additional information missing from the question is:

Currently 1,909,064 shares at 55.73 price with 2.37 dividend

Current Long Term Assets or Plant and Equipment are $84,380 (000)

Current Inventory $249 (000)

The correct option is A,Purchases assets at a cost of $25,000 (000)

Explanation:

The $25 million purchase of assets is the most significant of the options in that it would require most cash funding compared to dividends of $ 9,545,320.00  (1,909,064*$5).

Also the other cash inflows which would improve the cash position of the company are just $249,000 for inventory and $10 million for long-term assets.

All in all,only cash outflows put the company at risk of emergency loan and the most critical is the purchase of assets of $25 million