Firms Generally Choose to Finance Temporary Net Operating Working Capital

question 90

Multiple Choice

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.

Comprehend the special-interest effect and its reflection in political support for policies benefiting small interest groups at the expense of the general public.

Recognize the consequences of government regulations and actions on market operations and consumer choices.

Examine the factors leading to crony capitalism and government failure, including government spending and favoritism.

Explore the role of government action in resource allocation and the potential for counterproductive outcomes.

---

Definitions:

Market Rate

The prevailing price or interest rate available in the open market for goods, services, or securities.

Nominal Rate

The interest rate stated on a financial product or agreement without adjustment for inflation or other factors that affect the real value of returns.

Stated Value

Stated value refers to an arbitrary value assigned to the no-par value stock by the board of directors of a company, used for accounting purposes.

Effective Yield

The total yield on an investment, taking into account all compounding periods, fees, and other factors affecting the actual return.