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 Purchases assets at a cost of $15,000 (000) Liquidates the entire inventory Retires $20,000 (000) in long-term debt Sells $5,000 (000) of their Long-term assets

Answer 1

Answer: Retires $20,000 (000) in long-term

Explanation:

The action that will expose Digby to the most risk of needing a loan is the one that will involve using the most cash that the firm has.

By retiring Long term loans of $20,000 (000), Digby runs the risk of needing an emergency loan in the future because they did not take enough action to finance the company vs the amount in the cash balance that will be spent if they do indeed retire long term loans of that amount.

They have $19,743 (000) and yet only issued 100 (000) shares and $200 (000) of long-term debt. Should they payoff $20,000 (000), their cash flow will take a drastic hit which increases the likelihood of needing an emergency loan.