When a Firm Finances Long-Term Assets with Short-Term Sources of Funding,it

question 57

Multiple Choice

When a firm finances long-term assets with short-term sources of funding,it:

• A) reduces the risk of cash shortage.
• B) will generally have lower interest expense.
• C) improves the leverage ratio.
• D) violates the principle of matched maturities.

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Definitions:

Balance Sheet

An overview document showing a business’s assets, liabilities, and the equity of its shareholders on a specific date.

Sole Proprietorship

A business structure where an individual owns and operates the business entirely, bearing unlimited liability for its debts and obligations.

Stockholders' Equity

The owners' claim after subtracting total liabilities from total assets, representing the net value of a company to its shareholders.

Net Income

The residual financial gain of a company after deducting every cost, tax, and expense from the total earnings.