A conservatively financed firm would
A) use long-term financing for all fixed assets and short-term financing for all other assets.
B) finance a portion of permanent assets and short-term assets with short-term debt.
C) use equity to finance fixed assets, use long-term debt to finance permanent assets, and use short-term debt to finance fluctuating current assets.
D) use long-term financing for three items: permanent current assets, fixed assets, and a portion of the short-term fluctuating assets. Then use short-term financing for all other short-term assets.

Question

Quizplus · Accepted Answer

A conservatively financed firm would want to minimize the risk of default by matching the maturity of its assets with the maturity of its liabilities. Thus, the best choice is to use long-term financing for permanent assets and a portion of the short-term fluctuating assets that are not expected to be liquidated soon. On the other hand, short-term financing for all other short-term assets would be sufficient to cover the cash needs of a business that operates with conservative financing. Therefore, option D is the best choice.

A Conservatively Financed Firm Would