Question

Which of the following statements is CORRECT? a. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. b. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. c. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. d. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. e. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.

Answer 1

Answer: d. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.

Explanation:

Using short term financing is generally considered to be an aggressive strategy and is more often than not frowned upon by investors.

This is because of the reputational risk involved. A company that keeps using short term financing gives off the impression that it is barely keeping afloat and therefore relying on short term loans to continue functioning.

Other risks involved include, short term loans are usually given in small quantities so they cannot be used effectively as they will bareky go anywhere in terms of investment and their payback installment schedule can be in weeks instead of months like long term financing which can be detrimental to survival.

This is as opposed to a Conservative Approach that uses long term financing to finance most of it's Working Capital.