Question

Question #14 Finance A company's current cash balance is $20,482,000 and cash flows from operations next period remain unchanged. They take 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 Given this information, which of the following activities will expose them to the most risk of bankruptcy? A Liquidates the entire inventory B. Purchases assets at a cost of $15,000,000 C. D. E Sells $5,000,000 of their long-term assets Retires $20,000,000 in long-term debt All of the above Save Answer

Answer 1

Solution :

From the above questions and its various options , Option D retires $20,000,000 in Long term Debt will expose them to the most risk of bankruptcy.

Reasons:

a) Option a and c will only increase the current cash reserve but will not be creating any risk of bankruptcy.

b) Option d, retirement of debt with a without sinking fund or specified fund will create risk of bankruptcy, as cash surplus will reduced to only $ 482,000.t

c) Asset acquisition will indeed create blockage of funds but it will generate tax savings on depreciation, thereby improving profits.

d) All of the above cannot be possible, since option d will create the most risk of bankruptcy.