SOLUTION: THIS IS SO CONFUSING, NO MATTER HOW MANY TIMES I READ IT, THERE SEEMS TO BE NO ONE CLEAR ANSWER.... THE WORD PROBLEM IS: WHICH OF THE FOLLOWING WOULD NORMALLY OCCUR IF A FIRM I

Question 171307This question is from textbook FOUNDATIONS OF FINANCE
: THIS IS SO CONFUSING, NO MATTER HOW MANY TIMES I READ IT, THERE SEEMS TO BE NO ONE CLEAR ANSWER....
THE WORD PROBLEM IS:
WHICH OF THE FOLLOWING WOULD NORMALLY OCCUR IF A FIRM INCREASED ITS INVESTMENT IN CURRENT ASSETS?
A)THE FIRMS LIQUIDITY WOULD BE IMPROVED
B)THE FIRMS NET WORKING CAPITAL WOULD DECLINE
C)THE FIRMS LIQUIDITY WOULD WORSEN
D)THE FIRMS PROFIT MARGIN WOULD IMPROVE
This question is from textbook FOUNDATIONS OF FINANCE

Answer by solver91311(24713) (Show Source): You can put this solution on YOUR website!
First thing. Please stop typing in all CAPS. It is the electronic equivalent of shouting, therefore both rude and annoying. Thank you.

As to your question:

You can't say anything about liquidity because you don't know the character of the current assets. Those assets may or may not be liquid. Hence, answers A and C can be excluded.

Since there is no information in the problem that would indicate whether or not the increase in current assets has any impact either way on profitability, you can also exclude answer D.

B is the only one that is left, and it makes sense because the investment in current assets has to come from somewhere, and that somewhere is Net Working Capital.
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