Question

A firm Wants to strengthen its financial position. Which of the following actions would decrease its current ratio?

a. reduce the company's days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

b. use cash to re-purchase some of the company's own stock.

c. borrow using short term debt and use the proceeds to repay debt that has a maturity of more than one year.

d. issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

e. use cash to increase inventory holdings.

Answer 1

Option d is correct. Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

This is because Current ratio is given by Current asset divided by current liability. This ratio could be boosted if Current Assets goes up or if current liabilities falls down. The action like issuance of new stock and then use some procceds to purchase additional inventory will increase current assets with no impact in current liabilities.