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 $2,000 of current liabilities to long-term funds, the firm's net working capital would ________, the annual cost of financing would ________, and the risk of insolvency would ________, respectively. (See Table 15.2)
A) decrease; decrease; increase
B) increase; increase; decrease
C) decrease; increase; decrease
D) increase; decrease; decrease

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 $2,000 of current liabilities to long-term funds, the firm's net working capital would ________, the annual cost of financing would ________, and the risk of insolvency would ________, respectively. (See Table 15.2)
A) decrease; decrease; increase 
B) increase; increase; decrease 
C) decrease; increase; decrease 
D) increase; decrease; decrease

Quizplus · Accepted Answer

Shifting $2,000 from current liabilities to long-term funds increases net working capital by reducing immediate obligations, likely increases the annual cost of financing since long-term debt often carries higher interest rates, and decreases the risk of insolvency by easing short-term financial pressures.

Table 152 the Company Earns 5 Percent on Current Assets