Skip to content

CS Executive · Corporate Accounting and Financial Management · Working Capital Management

Which of the following is a feature of the trade-off between profitability and risk in working capital financing?

Long-term funds are generally costlier but reduce refinancing risk. Short-term funds are usually cheaper but must be renewed often, exposing the firm to liquidity risk. So more long-term financing of current assets lowers risk while normally reducing profitability.

  1. AShort-term funds are generally costlier but safer than long-term funds
  2. BLong-term funds are generally costlier but reduce the risk of refinancingCorrect
  3. CShort-term funds are cheaper than long-term funds in all circumstances and carry no renewal risk
  4. DUsing more long-term funds for current assets always raises profitability

Explanation

Long-term funds usually carry a higher cost (normal yield curve) but remove the need to renew frequently, lowering liquidity and refinancing risk. Short-term funds are typically cheaper but riskier. Hence conservative financing lowers risk at the expense of profitability.

Did you get it right without looking?

One question tells you little. A timed set on Working Capital Management shows your real accuracy, how long you take and where you lose marks.

Practise Working Capital ManagementFree diagnostic mock

More Working Capital Management questions