Answer (D) is correct . The maturity matching (self-liquidating) approach to financing of current assets minimizes the risk that the entity cannot pay its debts when they become due. It is based on the assumption that the firm can control when the assets are liquidated. Accordingly, the riskiest approach is to finance permanent assets with short-term debt. Moreover, short-term financing subjects the firm to greater risks of interest rate increases and loan renewal problems.
Answer (A) is incorrect because The risk of lack of liquidity is reduced when short-term debt is used to finance fluctuating current assets.
Answer (B) is incorrect because Financing permanent working capital with long-term debt minimizes the risks that (1) assets may not be liquidated in time to pay the debts, (2) interest rates will increase, and (3) loans will not be renewed.
Answer (C) is incorrect because The default risk of financing fluctuating current assets with long-term debt is lower than for financing permanent current assets with short-term debt. But the cost of long-term debt tends to be higher than the cost of short-term debt.
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