A firm wants to strengthen its financial position.Which of the following actions would increase its current ratio?
A) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase a new plant and equipment.
B) Use cash to repurchase some of the company's own stock.
C) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D) Issue new stock,then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E) Use cash to increase inventory holdings.

Question

Quizplus · Accepted Answer

The current ratio is calculated as current assets divided by current liabilities. Issuing new stock increases cash (a current asset), and using some of the proceeds to purchase additional inventory also increases current assets, while holding the remainder as cash further increases current assets without increasing current liabilities, thus improving the current ratio.

A Firm Wants to Strengthen Its Financial Position