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 ________, the annual profits on total assets would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 15.2)
A) increase; decrease; increase
B) decrease; increase; decrease
C) increase; decrease; decrease
D) decrease; increase; 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 ________, the annual profits on total assets would ________, and the risk of not being able to meet current obligations would ________, respectively. (See Table 15.2)
A) increase; decrease; increase 
B) decrease; increase; decrease 
C) increase; decrease; decrease 
D) decrease; increase; increase

Quizplus · Accepted Answer

Shifting $7,000 of fixed assets to current assets would increase the net working capital, as current assets would increase and current liabilities would remain the same. However, the annual profits on total assets would decrease because the company earns a higher return on fixed assets (15%) than on current assets (5%). The risk of not being able to meet current obligations would also decrease as the company has more current assets to cover current liabilities.

Table 152 the Company Earns 5 Percent on Current Assets