Question

Looking forward to next year, if Baldwin’s current cash balance is $17,334 (000) and cash flows from operations next period are unchanged from this period and Baldwin takes ONLY the following actions relating to cash flows from investing and financing activities: Issues 100 (000) shares of stock at the current stock price Issues $200 (000) of long-term debt Pays $40 (000) in dividends Which of the following activities will expose Baldwin to the most risk of needing an emergency loan? Select: 1Save Answer Sells $5,000 (000) of their Long-term assets Purchases assets at a cost of $15,000 (000) Retires $20,000 (000) in long-term debt Liquidates the entire inventory

Answer 1

Answer:

The activity that will expose Baldwin to the most risk of needing an emergency loan is:

Retires $20,000 (000) in long-term debt

Explanation:

If Baldwin wants to retire the long-term debt of $20 million, it requires an emergency loan because the available cash is not enough to settle the long-term debt.  Emergency loans charge higher interest rates.  Given the risk of debt default, putting itself in the position of having to retiring $20 million at a time is not so palatable.  Such long-term debts are better retired with long-term finance sources, like issuing shares.