Kang's Management Has the Option of Converting $100,000 in Debt

question 9

Multiple Choice

Kang's management has the option of converting $100,000 in debt into common shares of the company.What impact would the conversion have on the company's solvency as measured by the debt-to-total-assets and its liquidity as measured by the current ratio?

• A)The solvency would improve, but the liquidity would deteriorate.
• B)Both the solvency and the liquidity would improve.
• C)The solvency would improve, but the liquidity would remain unchanged.
• D)The solvency would not be affected, but the liquidity would improve.

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Definitions:

Nonsystematic Standard Deviation

A measure of the variability of an investment's return due to factors specific to the investment or its issuer, excluding broader market influences.

Macroeconomic Risks

Considered broad economic or political uncertainties that could affect the performance of financial markets and investments globally.

Security Selection

The process of choosing individual securities for investment with the goal of achieving the best possible return for a given level of risk.

Passive Strategy

A portfolio decision that avoids any direct or indirect security analysis. See passive management.