A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan.
The assets that an individual or organization can sell and transform into cash easily in one year or less are known as "current assets". These assets help the organization to manage the cash flows efficiently and effectively.
Answer and Explanation:
The interest rates of long term funds are higher than those of short term funds. The organizations can develop a plan for working capital giving short term funds a priority for financing current assets as well as some portion of permanent working capital. There are possibilities that the organizations face issues due to stringent time of paying back the amount of permanent current assets but then too it is recommended to use the short term financing because of its low cost as compared to the long term funds. Adoption of short term financing enables an organization to increase profit on a long term basis.
Therefore, short term financing stresses on the high return on more risk. Hence the statement is true.
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from Corporate Finance: Help & ReviewChapter 8 / Lesson 7