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.

Question

Quizplus · Accepted Answer

Firms choose to finance temporary current assets with short-term debt because it reduces risk under some circumstances and short-term debt is often less expensive than long-term capital. By matching the maturities of assets and liabilities, the firm can avoid potential losses due to interest rate changes or unexpected cash flow needs. Additionally, short-term debt generally has lower interest rates than long-term debt, which reduces the cost of financing temporary current assets.

Firms Generally Choose to Finance Temporary Current Assets with Short-Term