Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A) Illiquid assets and heavy short-term borrowing
B) Illiquid assets and heavy long-term borrowing
C) Liquid assets and heavy long-term borrowing
D) Liquid assets and heavy short-term borrowing

Question

Quizplus · Accepted Answer

Illiquid assets are difficult to convert to cash quickly, making it harder to meet short-term obligations if heavy short-term borrowing is the primary source of financing. This combination leads to a high degree of mismatch between assets and liabilities, increasing the volatility of earnings.

Which of the Following Combinations of Asset Structures and Financing