fm22 4 - 22-5 If an assets life and returns can be...

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Answers and Solutions: 22 - 4 22-5 If an asset’s life and returns can be positively determined, the maturity of the asset can be matched to the maturity of the liability incurred to finance the asset. This matching will ensure that funds are borrowed only for the time they are required to finance the asset and that adequate funds will have been generated by the asset by the time the financing must be repaid. A basic fallacy is involved in the above discussion, however. Borrowing to finance receivables or inventories may be on a short-term basis because these turn over 8 to 12 times a year. But as a firm’s sales grow, its investment in receivables and inventories grow, even though they turn over. Hence, longer-term financing should be used to finance the permanent components of receivables and inventory investments. 22-6 From the standpoint of the borrower, short-term credit is riskier because short-term interest rates fluctuate more than long-term rates, and the firm may be unable to repay the
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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