If a Company Uses Cash to Pay Off Some of Its

question 87

Multiple Choice

If a company uses cash to pay off some of its accounts payables,what effect will this have on its liquidity ratios,given that the ratios exceeded 1 before the payoff?

• A) The quick ratio and current ratio will both increase.
• B) The quick ratio and current ratio will both decrease.
• C) The quick ratio will increase but the current ratio will remain unchanged.
• D) The current ratio will increase but the quick ratio will remain unchanged.

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Definitions:

Retained Earnings

Profits that a company has kept or retained rather than paid out as dividends.

Cost Estimate

An approximation of the costs associated with completing a project, task, or transaction, often used in budgeting and planning.

WACC

Weighted Average Cost of Capital, the average rate of return a company is expected to pay its security holders to finance its assets.

Capital Components

The various sources of capital for a firm, including debt and equity, each with different costs and risks, influencing the company's WACC.