Which statement is true?
A) The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress.
B) The lower the liquidity ratios, the less liquidity risk a firm has.
C) Liquid assets generate profits for the firm.
D) Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.

Question

Quizplus · Accepted Answer

Liquid assets typically generate lower returns than investments in long-term assets or operations. While high levels of liquidity can protect a firm from liquidity crises by ensuring it has the assets to meet short-term obligations, this safety comes at the cost of potentially lower returns compared to investing in more profitable, albeit less liquid, assets or ventures.

Which Statement Is True