11. Which of the following statements is TRUE? a. Short term debt tends to be mo

Question

11.          Which of the following statements is TRUE?

a.           Short term debt tends to be more expensive than long term debt

b.            Low levels of inventory lead to higher profit margins.

c.             Maturity matching is generally considered to be an aggressive financing policy.

d.            Some firms choose to hold highly liquid, short-term securities as a substitute for demand deposits because securities earn interest and can be quickly converted to cash should cash be needed.

Explanation / Answer

Answer - b- Low levels of inventory lead to higher profit margins

Profit in other words gross profit here, is sales - Cost of goods sold. Inventory is spent when sales take place. So, inventory accumulation/buildup depends on the demand for the product or the sales level.

Lower levels of inventory indicates higher sales taking place. More quick the sales, more is the pace of generation of gross profit. ie. faster sales mean more profits. slower sales result in less profits.

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