Which of the following working capital financing policies subjects the firm to the greatest risk?
A) financing fluctuating current assets with long-term debt
B) financing permanent current assets with long-term debt
C) financing permanent current assets with short-term debt
D) financing fluctuating current assets with short-term debt

Question

Quizplus · Accepted Answer

Financing permanent current assets with short-term debt subjects the firm to the greatest risk, as the firm will have to constantly renew short-term debt to finance its permanent current assets. This exposes the firm to interest rate risk and the potential for creditors to refuse to renew the short-term debt, leaving the firm unable to finance its ongoing operations. Financing fluctuating current assets with short-term debt also has risk, but it is more manageable as the firm can adjust its current assets to match its current liabilities. Financing current assets with long-term debt reduces the risk of having to constantly renew debt, but it can expose the firm to liquidity risk if it cannot generate sufficient cash flow to service the debt.

Which of the Following Working Capital Financing Policies Subjects the Firm