A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to first mortgage bonds when the plant is completed would want to separate the construction loan from its other current liabilities associated with working capital management.

Question

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It is common practice to separate long-term financing for capital expenditures, such as constructing a new manufacturing plant, from short-term working capital needs. This allows for better management of the different types of financing and ensures that the long-term financing is not at risk of being used for short-term needs. Therefore, the firm would want to separate the construction loan from its other current liabilities associated with working capital management.

A Firm Constructing a New Manufacturing Plant and Financing It