CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A company is experiencing a cash shortfall and is considering a secondary source of liquidity. Which action is most likely a secondary source of liquidity?
Negotiating a revised debt agreement with lenders is most likely a secondary source of liquidity. Secondary sources, such as renegotiating debt or liquidating assets, fall outside normal operations and can signal financial distress. Collecting receivables and drawing on short-term investments are primary sources.
- ACollecting receivables on normal terms
- BDrawing on its short-term investment account
- CNegotiating a revised debt agreement with lendersCorrect
Explanation
Secondary sources include negotiating debt contracts, liquidating assets, and filing for bankruptcy protection and reorganization. Collecting receivables and using short-term investments are part of normal operations and are primary sources. Secondary sources can signal weakness and may change the firm's operations.
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