In a period of high inflation, which of the following companies would likely benefit the most in real terms?

Answer options:

A company with significant cash holdings.

A company with long-term fixed-rate assets (receivables).

A company with significant long-term fixed-rate debt.

A company with low inventory turnover.

How to approach this question

Identify who wins/loses in inflation. Borrowers (fixed rate) win. Lenders/Savers lose.

Full Answer

C.A company with significant long-term fixed-rate debt.✓ Correct

Inflation erodes the purchasing power of currency. A borrower with fixed-rate debt pays back the principal and interest using dollars that are worth less than when they borrowed them. Thus, the real cost of the debt decreases.

Common mistakes

Thinking cash is safe during inflation (it loses value).

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