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

The answer is: Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.

This statement is not entirely accurate. While liquid assets can be used to generate profits, they are typically held to meet short-term obligations and may not directly generate profits. Liquid assets like cash or cash equivalents usually offer lower returns compared to other investments.

This statement is true. Holding high levels of liquid assets ensures that a firm can meet its short-term obligations and avoid liquidity crises. However, these assets often yield lower returns compared to less liquid investments, which can reduce overall profitability.

This statement is false. Lower liquidity ratios indicate that a firm has fewer liquid assets relative to its liabilities, which increases liquidity risk. Higher liquidity ratios suggest that a firm is better positioned to meet its short-term obligations.

This statement is incorrect. Holding fewer liquid assets increases the risk of financial distress because the firm may struggle to meet its short-term obligations, especially in times of financial uncertainty or unexpected expenses.