Answer (A) is correct . An increase in the proportion of short-term financing will not affect a company’s degree of leverage, but risk is increased because of the need for frequent refinancing. Because the debtor company will be forced to meet principal and interest payments quickly, perhaps before expected funds from a new project, the danger of default is increased. Also, future interest rates are difficult to predict.
Answer (B) is incorrect because Leverage is the use of borrowed funds to earn returns for stockholders. It is irrelevant whether the borrowed funds are long- or short-term.
Answer (C) is incorrect because The length of a loan does not affect the amount of liquid assets. Both long- and short-term loans result in liquid assets.
Answer (D) is incorrect because An increase in current liabilities decreases the current ratio.
|
