In the online FM MCQ Test, there was a question that offered an answer: Using long-term capital to finance working capital is less risky than using short-term capital.
I've seen the lecture note and watched the video class, but I'm sorry I still can't quite understand why is this? I thought it should depend on what kind of working capital that is, like: For permanent capital, using long-term capital to finance is better; and for temporary capital, it is better using short-term capital to finance.
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Question in FM Chapter 3
4y ago#1The statement is not saying that using long-term finance is better or worse for the financing of working capital (and for that, what you have written is correct).
The statement is saying that using long-term finance is more risky, and that is not true. There is less risk because the interest rate will be fixed (which is not the case with short-term/overdraft interest). However that is not saying that therefore they would be better to use long-term finance.
Aaaa, then it makes so much sense! Thank you, John!!
4y ago#3You are welcome :-)
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