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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) Capital ... 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
Identify the implications of undervalued assets
Answer
A company with highly undervalued plant and equipment may face significant risks including potential asset stripping, which refers to the selling off of its assets for cash, often at a loss. This occurs when investors or stakeholders recognize that the assets do not reflect the true value, leading to a decrease in the company's perceived financial health.
Step 2
Consider the options
Answer
Looking at the provided options:
- (A) Asset stripping is likely, as undervalued assets attract asset strippers who wish to take advantage of the low valuation.
- (B) Growth in equity is less likely since undervalued assets typically indicate financial distress rather than growth.
- (C) Capital expansion does not directly relate to the issue of undervaluation; instead, it would require a healthy valuation of assets.
- (D) Factoring of liabilities is unrelated to the undervaluation of assets.
Therefore, the most appropriate answer is (A) Asset stripping.