If a Firm Faces Short-Term Financing Difficulties (As Happened in the Liquidity

question 14

Multiple Choice

If a firm faces short-term financing difficulties (as happened in the liquidity crisis of 2008-2009) and forecasts a reduction of its sales revenue due to global recession,which of the four possible course of action described below would it be best advised to implement:

• A) Liquidate as much of its inventory as possible and sell its receivables so as to pay as much as possible of its short-term debt.
• B) Use its cash on hand to first settle its short-term debt,negotiate longer credit terms with suppliers,and analyze receivables to stop selling to slow-paying customers.
• C) Issue long-term bonds and invest in more capacity,more R&D,more product launches and higher levels of inventory to better serve customers.
• D) Reduce simultaneously and within market constraints its inventory level,credit terms to customers,and cash in a reasoned way (leading to reduced activity and thus reduced payables)and weed receivables from slow payers.

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Definitions:

Survival of Society

The ability of a society to maintain existence, adapt, and continue to function over time.

Talcott Parsons

An American sociologist known for his development of social action theory and for his role in the establishment of the structural-functional approach in sociology.

Adaptation

The process by which individuals, species, or groups adjust to changes in their environment, ensuring survival or improved functionality.

External Context

The surrounding conditions or circumstances external to a specific focus or object of study.