Question

If a firm borrowed money on a six-month bank loan, the firm's working capital immediately after obtaining the loan, relative to its working capital just prior to the loan, would be:

1) The same.
2) Lower.
3) Would depend on the amount borrowed.
4) Higher.

Answer 1

After obtaining a six-month bank loan, a firm's working capital would be higher compared to just prior to the loan, due to the immediate cash inflow. Option 4.

Step-by-step explanation:

When a firm borrows money through a six-month bank loan, its working capital immediately after obtaining the loan would be higher (4) relative to its working capital just prior to the loan. The reason is that the firm's current assets increase as a result of the cash inflow from the loan, while current liabilities also usually increase due to the loan obligation. However, since the loan provides immediate cash, that increases the firm's ability to cover short-term obligations, which enhances working capital initially.