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Chapter 3: Q6DQ (page 182)

By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

Short Answer

Expert verified

Long-term financing is an expensive financing method, whichwill lower the organization鈥檚 profits.

Step by step solution

01

Meaning of long-term financing

Long-term financing refers to the financing taken by an organization for more than one year. This financing option is taken to fulfil the long-term financial requirements of the organization.

02

The significance of the given statement

If the company uses long-term financing for its current temporary assets, it will provide the necessary funds in the long term, but the cost of long-term financing is higher than that of short-term financing. So, the profits generated by the organization will be lower when utilizing long-term financing.

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Most popular questions from this chapter

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

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