Question

Looking forward to next year, if Digby’s current cash balance is $19,743 (000) and cash flows from operations next period are unchanged from this period and Digby 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 $200 (000) of long-term debt
Pays $40 (000) in dividends
Which of the following activities will expose Digby to the most risk of needing an emergency loan?
Select: 1
a) Purchases assets at a cost of $15,000 (000)
b) Retires $20,000 (000) in long-term debt
c) Liquidates the entire inventory
d) Sells $5,000 (000) of their Long-term assets

Answer 1

Answer:

The correct answer is B)

Explanation:

We know what he just spent a total of $340,000 on shares of stock, long-term debt and , dividends respectively. This means he is left with a cash balance of $16, 403, 000.

• If he purchases an assets at a cost of $15,000,000 he ls left with a little above $1.4 Million in cash.
• If the sells $5 Million of the company's assets, his cash balance goes up by that amount. No need for a loan.
• If he liquidates the entire inventory, it only translates to more cash. So no  need for a loan.
• However, if he settles $20 Million in debt, he is left with a deficit of $3,597,000 and must take up a loan immediately to stay afloat or be consumed by the weight of operating expenses.

Cheers!