alleryStart learning →A basic principle of finance matches the term of the financing to what?
AThe credit rating held by the borrowing firm
BThe period over which benefits are received
CThe dividend the firm expects to pay owners
DThe tax rate that applies to the firm's profit
Answer & Solution
Correct answer: B. The period over which benefits are received
1. The principle is to match the term of the financing to the period over which benefits are expected from the associated outlay.
2. Short-term items should be financed with short-term funds.
3. Long-term items should be financed with long-term funds.
4. That is why a factory bought for decades of use is not funded by 90-day commercial paper, however cheap the rate looks.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 16 "Understanding Financial Management and Securities Markets", section 16.4 Raising Long-Term Financing_
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