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.
-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 14.2)
A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

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.
-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 14.2)
A)increase; increase 
B)decrease; decrease 
C)increase; decrease 
D)decrease; increase

Quizplus · Accepted Answer

Shifting $7,000 from fixed assets to current assets would increase the net working capital because current assets would increase by $7,000. However, the risk of not meeting current obligations would decrease because the company earns 5 percent on current assets, which is lower than the average cost of long-term funds at 20 percent. Therefore, having more current assets and less fixed assets would lead to lower financing costs and lower risk of defaulting on current obligations.

Table 142 the Company Earns 5 Percent on Current Assets