Firms generally choose to finance temporary net operating working capital with short-term debt because
A) Matching the maturities of assets and liabilities reduces risk.
B) Short-term interest rates have traditionally been more stable than long-term interest rates.
C) A firm that borrows heavily long-term is more apt to be unable to repay the debt than a firm that borrows heavily short-term.
D) The yield curve has traditionally been downward sloping.
E) Sales remain constant over the year, and financing requirements also remain constant.

Question

Quizplus · Accepted Answer

Matching the maturities of assets and liabilities reduces risk. Temporary net operating working capital is a short-term asset and financing it with short-term debt helps to match the maturity of the asset with the liability, reducing the risk of potential losses due to interest rate fluctuations, default risk, or liquidity risk. This also allows the firm to avoid the costs associated with refinancing long-term debt.

Firms Generally Choose to Finance Temporary Net Operating Working Capital