Question

You have invested $6,000 in plant improvements and financed $6,000 long-term debt to pay for it. You have also elected to retire $6,000 of long-term debt. Now, your closing cash position reads -$3,000. How can you fix the current financial decisions so that you have a healthy cash position at the end of the year?

Answer 1

Answer:

• Retire Long Term debt at $0
• Issue Long Term Debt at $6,000

Explanation:

If you elect to both retire the $6,000 in long term debt and also issue long term debt of the same amount, your cash balance would be -$3,000 which is unhealthy.

What you should do therefore, is to retire no long term debt while still issuing the long term debt of $6,000 to pay for the investment in plant improvement. This will leave you with a cash balance of $3,000 which is healthy enough.