Table 15.2 The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 15.2)
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Question

Table 15.2  The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
-If the firm was to shift $7,000 of fixed assets to current assets, the firm's net working capital would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 15.2)
A) increase; increase 
B) decrease; decrease 
C) increase; decrease 
D) decrease; increase

Quizplus · Accepted Answer

If the firm shifts $7,000 of fixed assets to current assets, the net working capital will increase because current assets will increase by $7,000, while fixed assets will decrease by the same amount. Therefore, the firm's ability to meet its current obligations will increase, reducing the risk of not being able to meet them.

Table 152 the Company Earns 5 Percent on Current Assets