When a firm finances long-term assets with short-term sources of funding,it:

Question

Quizplus · Accepted Answer

Financing long-term assets with short-term sources of funding ignores the principle of matched maturities, which can lead to a potential cash flow mismatch and increase the risk of financial distress. Therefore, Option D is the correct answer. Option A is incorrect because short-term funding sources can increase the risk of cash shortages. Option B is incorrect because short-term funding sources often carry higher interest rates than long-term sources, leading to higher interest expense. Option C is incorrect because financing long-term assets with short-term funding sources can increase the leverage ratio, making the firm more susceptible to financial risk.

When a Firm Finances Long-Term Assets with Short-Term Sources of Funding,it