A Conservatively Financed Firm Would

question 77

Multiple Choice

A conservatively financed firm would

• A) use long-term financing for all fixed assets and short-term financing for all other assets.
• B) finance a portion of permanent assets and short-term assets with short-term debt.
• C) use equity to finance fixed assets, long-term debt to finance permanent assets, and short-term debt to finance fluctuating current assets.
• D) use long-term financing for permanent current assets and fixed assets and a portion of the short-term fluctuating assets and use short-term financing for all other short-term assets.

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Definitions:

DOL

Stands for Degree of Operating Leverage, which measures a company’s sensitivity of operating income to its sales.

EBIT

Earnings Before Interest and Taxes represent a company's profit before deducting expenses from interest and income taxes.

Sales Increase

An uptick in the amount of products or services sold by a company, typically measured within a specific time frame.

MM Model

MM Model refers to the Modigliani-Miller theorem, which propositions about the irrelevance of capital structure in determining the overall value of a firm under certain market conditions and assumptions.