Which of the following statements is CORRECT?
A) Net working capital is defined as operating current assets minus the difference between current liabilities and notes payable,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 operating current assets minus the difference between current liabilities and notes payable,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.

Question

Quizplus · Accepted Answer

B is correct because it accurately describes the risk associated with using short-term debt despite its historical average of lower interest rates compared to long-term rates. The aggressive strategy comes from the volatility and refinancing risks of short-term debt.

Which of the Following Statements Is CORRECT