All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ risk of the firm encountering financial difficulties.
A) large; higher
B) small; higher
C) constant; higher
D) constant; lower

Question

Quizplus · Accepted Answer

Holding a large proportion of current assets may provide liquidity but it also reduces profitability as current assets generally earn lower returns. Conversely, holding a small proportion of current assets may enhance profitability but increases the risk of illiquidity and financial difficulties. Therefore, a policy of holding a relatively small proportion of the firm's total assets in the form of current assets will tend to result in a higher risk of the firm encountering financial difficulties.

All Other Things Being Equal, a Policy of Holding a Relatively