Why would a firm ever use short-term debt to finance permanent current assets?
A)This would be illogical and is rarely observed.
B)This would occur if short-term rates were much lower than long-term rates.
C)This would only occur if the managers were very conservative.
D)None of these.

Question

Quizplus · Accepted Answer

If short-term interest rates are lower than long-term rates, it may make financial sense for a firm to use short-term debt to finance permanent current assets. This is because the firm can borrow at a lower rate and invest the borrowed funds in assets that generate a higher return than the cost of borrowing. However, this strategy exposes the firm to interest rate risk which can increase the cost of borrowing in the future if interest rates rise. Thus, this strategy requires careful consideration of the firm's financial position and market conditions.

Why Would a Firm Ever Use Short-Term Debt to Finance