A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financed with a loan. The most likely consequence of this action is
A) a decrease in the current ratio.
B) an increase in net working capital.
C) a decrease in the risk of technical insolvency.
D) an increase in long-term debt.

Question

Quizplus · Accepted Answer

An aggressive financing strategy involves using more debt as a source of financing. Therefore, the purchase of a major fixed asset financed with a loan would result in an increase in long-term debt, making option D the best choice. Options A and C are incorrect because the current ratio (current assets divided by current liabilities) would not necessarily decrease, and the risk of technical insolvency would not necessarily decrease either. Option B is incorrect because while the purchase of the fixed asset may increase net working capital temporarily, the impact on net working capital would depend on other factors such as the timing of cash flows from operations.

A Firm Which Uses the Aggressive Financing Strategy Plans to Purchase