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

Question

Quizplus · Accepted Answer

Financing permanent working capital with short-term debt subjects the firm to the greatest risk because short-term debt has to be repaid within a year, whereas permanent working capital needs financing for a longer-term. Thus, there will be a constant need for short-term financing which increases the risk of not being able to secure it when needed. This can result in default or bankruptcy for the firm.

Which of the Following Working Capital Financing Policies Subjects the Firm