A negative feature of defining investment by excluding the portion of total assets employed that are financed by short-term creditors is that:
A)short-term debt is always more expensive to finance than long-term debt.
B)current liabilities are sometimes difficult to define.
C)this method encourages managers to use an excessive amount of short-term debt.
D)this method encourages managers to use an excessive amount of long-term debt.

Question

Quizplus · Accepted Answer

By excluding the portion of total assets financed by short-term creditors, managers may be encouraged to use an excessive amount of short-term debt since it isn't counted as part of the investment. This could lead to an increased risk of default if the company is unable to pay back the short-term debt on time.

A Negative Feature of Defining Investment by Excluding the Portion