If a firm relies on short-term debt or current liabilities in financing its asset investments,and all other things remain the same,what can be said about the firm's liquidity?
A) The firm will be relatively more liquid.
B) The firm will be relatively less liquid.
C) The liquidity of the firm will be unchanged.
D) The firm will be more liquid only if interest rates are below the company's weighted average cost of capital.

Question

Quizplus · Accepted Answer

Relying on short-term debt or current liabilities to finance asset investments increases the firm's reliance on borrowing to finance its operations. This increases the firm's risk of default if it is unable to refinance or roll over the debt. As a result, the firm's liquidity is decreased, making it relatively less liquid.

If a Firm Relies on Short-Term Debt or Current Liabilities