Question

Chester currently has $17,334 (000) in cash and management has decided to issue stocks and bonds worth an additional $8,000 (000). Assuming that cash from operations will be the same for each of the following activities, which activity exposes this company to the most risk of being issued an emergency loan? Select: 1 A $5 dividend Liquidate the entire inventory Purchasing $18,000 (000) worth of plant and equipment Retiring the oldest bond

Answer 1

Answer:

Purchasing $18,000 (000) worth of plant and equipment

Explanation:

The purpose of an emergency loan is to help a company pay its current liabilities and obligations because they temporarily o not have enough cash. A company might be economically very healthy, but financially unstable. E.g. a company increased its total sales by handing out more credit to its customers, but it cannot collect its accounts receivables fast enough to pay for its current obligations.

In this case, since we do not know the number of outstanding stocks nor the value of the oldest bonds, we cannot choose these options. While liquidating the inventory would increase the cash balance, not decrease it. The only action that we know for sure would severely affect the cash position of the company is purchasing a lot of equipment in cash.