Which of the following statements is correct?
A) Under normal conditions,a firm's expected ROE probably would be higher if it financed with short-term than with long-term debt,but the use of short-term debt would probably increase the firm's risk.
B) Conservative firms generally use no short-term debt and thus have zero current liabilities.
C) A short-term loan can usually be obtained more quickly than a long-term loan,but the cost of short-term debt is likely to be higher than that of long-term debt.
D) If a firm that can borrow from its bank buys on terms of 2/10,net 30,and if it must pay by Day 30 or else be cut off,then we would expect to see zero accounts payable on its balance sheet.
E) If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

Question

Quizplus · Accepted Answer

Under normal conditions, short-term debt has a lower cost of capital than long-term debt. However, it also increases the risk of the firm because it must be continually refinanced. Long-term debt, on the other hand, has a higher cost of capital but provides more stability and lower risk. Therefore, A is the correct statement. B is incorrect because conservative firms may still use short-term debt, and not all current liabilities are short-term debt. C is incorrect because short-term debt typically has a lower cost of capital than long-term debt. D is incorrect because accounts payable represent the amount owed to suppliers and are not affected by payment terms. E is incorrect because stretching accounts payable does represent a cost to your firm in the form of lost interest on the unpaid balance.

Which of the Following Statements Is Correct