Question

Your company has a policy to use long-term debt to finance inventory and receivables.

A. This is a restrictive short-term financing policy
B. This policy has higher carrying cost
C. This policy has higher shortage cost
D. This policy leads to higher default risk

Answer 1

D. This policy leads to higher default risk.

Step-by-step explanation:

Financing a company's long term debt by its current assets is risky. Current assets are used to run day to day business operations. If the current assets fall below minimum level the working capital of the firm will decline resulting in risk to business operations continuity.