Which of the following statements is CORRECT? Select one: a. Net working capital

Question

Which of the following statements is CORRECT?

Select one:

a. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.

b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.

c. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.

d. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.

e. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.

Explanation / Answer

The financing of long-term assets from short-term debt or heavy use of short-term debt is considered as the aggressive strategy. This is because the short-term debt is considered riskier than the long-term debt. The long-term debt requires repayment of principal over a longer period than the repayment period of short-term debt, and non-payment of debt on time can make the borrower bankrupt.

Thus, the correct answer is option b.

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