Holding all other factors constant, if a firm increases its current assets relative to total assets,
A) its financing costs will fall.
B) net working capital will rise.
C) has no effect on return and reduces risk.
D) it reduces return and increases risk.

Question

Quizplus · Accepted Answer

Increasing current assets relative to total assets increases net working capital, which is a measure of a company's liquidity. This can help reduce the risk of the firm not being able to meet its short-term obligations. However, it may also reduce return as current assets (such as cash and inventory) typically generate lower returns than long-term assets (such as property and equipment). It has no effect on financing costs.

Holding All Other Factors Constant, If a Firm Increases Its