Your Boss Decides That Your Firm Will Switch from a Restrictive

question 246

Multiple Choice

Your boss decides that your firm will switch from a restrictive short-term financial policy to a more flexible policy. You should expect to see the firm's current ratio:

• A) Rise, due to the higher investment in current assets and the reduced use of short-term financing.
• B) Fall, due to the lower investment in current assets and the increased reliance on short-term financing.
• C) Rise, due to the lower investment in current assets and the greater use of short-term financing.
• D) Fall, due to the higher investment in current assets and the reduced use of short-term financing.
• E) To either rise or fall, but the use of short-term debt will increase.

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Definitions:

Depositor Moral Hazard

A situation in financial systems where depositors engage in riskier behaviors because they know their deposits are protected, for instance, by government insurance.

Savings and Loan Industry

A sector of the financial services industry that specializes in accepting savings deposits and making mortgage and other loans.

Flood Control System

Engineering and planning efforts designed to manage water flow and protect areas from flooding.

Expected Loss

The anticipated amount of loss in an investment, calculated as the probability of the loss occurring multiplied by the amount of the potential loss.