Table 14.2 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.
-The firm would like to increase its current ratio. This goal would be accomplished most profitably by ________. (See Table 14.2)

Question

Table 14.2  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.
-The firm would like to increase its current ratio. This goal would be accomplished most profitably by ________. (See Table 14.2)

Quizplus · Accepted Answer

Increasing current assets will increase the current ratio, while decreasing current assets or increasing current liabilities would decrease the current ratio. Since the company earns a lower return on current assets compared to fixed assets, increasing current assets would also be the most profitable option.

Table 142 the Company Earns 5 Percent on Current Assets