Which of the following statements is CORRECT?
A) Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
B) Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
C) If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
D) Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.

Question

Quizplus · Accepted Answer

B is correct because it accurately describes the nature of short-term vs. long-term interest rates and the risk associated with using short-term debt. Historically, short-term interest rates are lower than long-term rates, but relying heavily on short-term debt is risky due to interest rate fluctuations and refinancing risk, making it an aggressive financing strategy. Choices A, C, and D contain inaccuracies regarding the definitions and implications of net working capital and the concept of "matching maturities."

Which of the Following Statements Is CORRECT