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SK
SK , Chartered Accountant (CA)
Category: Finance
Satisfied Customers: 94
Experience:  4.5 Yrs Industry Experience, Chartered Accountant from India, Cleared CPA Exam & CFA Level 1 Exam
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28) Which of the following combinations of asset structures

Customer Question

28) Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A. Liquid assets and heavy long-term borrowing
B. Illiquid assets and heavy long-term borrowing
C. Illiquid assets and heavy short-term borrowing
D. Liquid assets and heavy short-term borrowing



29) Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings?
A. Liquid assets and heavy long-term borrowing
B. Illiquid assets and heavy long-term borrowing
C. Illiquid assets and heavy short-term borrowing
D. Liquid assets and heavy short-term borrowing



30) An aggressive, risk-oriented firm will likely
A. borrow long-term and carry high levels of liquidity.
B. borrow short-term and carry low levels of liquidity.
C. borrow long-term and carry low levels of liquidity.
D. borrow short-term and carry high levels of liquidity.
Submitted: 7 years ago.
Category: Finance
Expert:  SK replied 7 years ago.

28 C

 

29 A

 

30 B

 

 

Customer: replied 7 years ago.
#30 is incorrect I will not be purchasing this answer
Expert:  SK replied 7 years ago.

My reason for aswering B for question 30 is following

 

The firm is expecting a higher return due to using the short term loan to allow them to purchase more from a supplier at a lower cost. Once the product is sold at the regular price and the revenue comes in the loan can be paid off and the firm wil have a higher cash in flow.

 

 

AGGRESSIVE PLAN

(SHORT TERM FINANCING/LOW LIQUIDITY)

 

If you adopt a financing plan which uses short term funds, and your asset liquidity is low then it is an aggressive and risky approach for the following reasons:

 

1. Profit factor - There is a possibility of high profits because your assets are less liquid and therefore well invested in the business.

 

2. Profit factor - You are using short term financing and hence the interest costs could be low resulting in lesser interest expense thereby helping profits.

 

3. Risk Factor - Since the financing is short term there is every possibility that the interest rates could go up resulting in a higher interest expense when the finances need to be renewed or the lender may refuse to renew.

 

4. Risk Factor - Since the assets are less liquid there may not be enough cash to meet short term obligations.

Customer: replied 7 years ago.
Another expert already answered my question - I will not be purchasing this answer
Expert:  SK replied 7 years ago.
Its ok.