Question

Chester currently has $17,624 (000) in cash and management has decided to issue stocks and bonds worth an additional $8,000 (000). Assuming that cash from operations will be the same for each of the following activities, which activity exposes this company to the most risk of being issued an emergency loan?

a) purchasing $18,000 (000) worth of plant and equiptment
b) liquidate the new inventory
c) retiring the oldest bond
d) a $5 dividend

Answer 1

Answer: a) purchasing $18,000 (000) worth of plant and equipment

Step-by-step explanation:

Of the 4 options listed, liquidating the new inventory would lead to a cash inflow and so is not going to lead to an emergency loan.

Retiring the oldest bond is something that would probably have been budgeted for so it will be less probable to cause Chester to seek emergency funding.

The activity that poses the greatest threat to Chester in terms of loan solicitation would be the purchase of plant and equipment. This would have less chance of being budgeted for and is a significant amount to leave the company which is even larger than the company's current cash amount. It has a higher chance of causing Chester to seek emergency loan funding.