Firms generally choose to finance temporary current assets with short-term debt
ID: 2670397 • Letter: F
Question
Firms generally choose to finance temporary current assets with short-term debt because
a)matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
b)short-term interest rates have traditionally been more stable than long-term interest rates.
c)a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
d)the yield curve is normally downward sloping.
e)short-term debt has a higher cost than equity capital.
Explanation / Answer
a is the answer matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
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