What might happen as a result of a company having highly undervalued plant and equipment on its balance sheet?
(A) Asset stripping
(B) Growth in equity
(C) Capital expansion
(D) Factoring of liabilities - HSC - SSCE Business Studies - Question 20 - 2010 - Paper 1
Question 20
What might happen as a result of a company having highly undervalued plant and equipment on its balance sheet?
(A) Asset stripping
(B) Growth in equity
(C) Capita... show full transcript
Worked Solution & Example Answer:What might happen as a result of a company having highly undervalued plant and equipment on its balance sheet?
(A) Asset stripping
(B) Growth in equity
(C) Capital expansion
(D) Factoring of liabilities - HSC - SSCE Business Studies - Question 20 - 2010 - Paper 1
Step 1
Asset stripping
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Answer
Asset stripping refers to the practice of selling off a company's assets, often at undervalued prices, to generate cash. If a company's plant and equipment are undervalued, it may indicate that they are selling their assets below their market value, potentially leading to a depletion of resources that can disadvantage the company in the long run.
Step 2
Growth in equity
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Answer
While undervalued assets can initially suggest potential for growth, they may not lead to actual growth in equity unless recognized and appropriately leveraged. If the undervalued assets are not addressed, the company's equity growth may be hindered.
Step 3
Capital expansion
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Answer
Capital expansion involves increasing the company's capacity or assets. If plant and equipment are undervalued, the company may not have the necessary funds from those assets to effectively expand, potentially stalling growth opportunities.
Step 4
Factoring of liabilities
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Answer
Factoring of liabilities refers to converting debts into cash. If a company has undervalued assets, it might also struggle with managing its liabilities effectively, leading to financial instability and potentially having to factor liabilities to maintain operations.
