Final answer:
When temporary working capital is financed with long-term debt, there are both risks and profitability factors to consider. The risk lies in the potential for mismatched funding sources, while the profitability is based on lower interest rates associated with long-term debt.
Step-by-step explanation:
When temporary working capital is financed with long-term debt, there are both risks and profitability factors to consider.
The risk lies in the potential for mismatched funding sources. Temporary working capital refers to the short-term capital needed to support a company's day-to-day operations, while long-term debt refers to debt with a maturity period of more than one year. The risk arises when the company faces a situation where its short-term obligations cannot be met by the long-term financing source.
The profitability of financing temporary working capital with long-term debt can be analyzed from the perspective of interest payments. Long-term debt often comes with lower interest rates compared to short-term debt, therefore reducing the cost of financing. This can positively impact a company's profitability by lowering its interest expense.