Question

Looking forward to next year, if Baldwin's current cash balance is $19,743,000 and cash flows from operations next period are unchanged from this period, and Baldwin 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 $400,000 in bonds, retires $10,000,000 in debt. Which of the following activities will expose Baldwin to the most risk of needing an emergency loan?

1) Issuing 100,000 shares of stock at the current stock price
2) Issuing $400,000 in bonds
3) Retiring $10,000,000 in debt
4) Cash flows from operations next period being unchanged from this period

Answer 1

Retiring $10,000,000 in debt carries the risk of significantly depleting Baldwin's cash reserves and thus poses the highest risk of needing an emergency loan if the company's cash flows from operations are unchanged and no other financing activities occur.

Step-by-step explanation:

The student has asked about the activity that would expose Baldwin to the most risk of needing an emergency loan considering its current cash balance and planned financial activities. To answer this question, we need to evaluate the risk of each action in terms of its impact on the company's cash balance and potential cash requirements.

Issuing stock and bonds typically brings cash into a company and would increase its cash reserve, thus reducing the risk of needing an emergency loan. However, retiring a significant amount of debt like $10,000,000 would lead to a large outflow of cash, which could significantly deplete the company's cash reserves. Without other changes in the cash flow from operations or other financing activities, retiring a large chunk of debt like this could increase the risk of the company needing an emergency loan if unexpected expenses arise or if operations underperform.

Cash flows from operations being unchanged suggests steadiness but does not inherently increase risk unless they are currently not sufficient to cover operational expenses and debt obligations.