Which of the following statements is most correct?
A) Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but the use of short-term debt would probably increase the firm's risk.
B) Conservative firms generally use no short-term debt and thus have zero current liabilities.
C) A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is likely to be higher than that of long-term debt.
D) If a firm that can borrow from its bank buys on terms of 2/10, net 30 days, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
E) If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

Question

Quizplus · Accepted Answer

Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but the use of short-term debt would probably increase the firm's risk. Choice B is incorrect because even conservative firms can have current liabilities such as accounts payable. Choice C is partially correct in that short-term loans can usually be obtained more quickly, but the cost of short-term debt is not necessarily always higher than long-term debt. Choice D is incorrect because the firm would have accounts payable on its balance sheet even if it pays within the 30-day period. Choice E is incorrect because stretching of accounts payable can represent a financial cost due to the opportunity cost of having to wait longer to receive payment.

Which of the Following Statements Is Most Correct