Firms Generally Choose to Finance Temporary Current Operating Assets with Short-Term

question 57

Multiple Choice

Firms generally choose to finance temporary current operating assets with short-term debt because

• A) short-term interest rates have traditionally been more stable than long-term interest rates.
• B) a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
• C) the yield curve is normally downward sloping.
• D) short-term debt has a higher cost than equity capital.
• E) matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

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Definitions:

Potlatch

On the northwestern coast of North America, a ceremonial event in which a village chief publicly gives away stockpiled food and other goods that signify wealth.

Conspicuous Consumption

The spending of money on luxury goods and services to publicly display economic power—the social status of the consumer.

Ecological Adaptive

The process by which organisms adjust to changes in their environment to maintain or improve their survival prospects.

Domesticated

Refers to animals or plants that have been modified from their natural states to be of use to humans through selective breeding.