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      Question

      Which of the following strengthens a company's solvency

      position?
      A Increasing short-term borrowings only Correct Answer Incorrect Answer
      B Reducing long-term debt and increasing retained earnings (equity) Correct Answer Incorrect Answer
      C Increasing inventory levels drastically Correct Answer Incorrect Answer
      D Paying dividends financed by debt Correct Answer Incorrect Answer

      Solution

      Solvency refers to a company's long-term financial health and its ability to meet long-term obligations. Reducing debt and increasing equity improves the debt-to-equity ratio and strengthens the solvency position.

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