Final answer:
Using long-term capital to cover short-term needs does not necessarily lead to insolvency if managed properly. Firms must choose financing methods that match their needs and ensure survival and growth. The use of long-term funds for short-term liabilities can be strategic if it aligns with the firm's overall capital structure and investment goals.
Option 'b' is the correct.
Step-by-step explanation:
The statement that using long-term capital to cover short-term needs virtually assures a firm of becoming technically insolvent is false. Insolvency occurs when a firm cannot meet its financial obligations as they come due. However, if the firm has a reliable source of financial capital and has planned adequately for its capital structure, using long-term funds to meet short-term liabilities can be a part of a sound financial strategy, especially if it allows the firm to survive through tough times and prevents disruption to operations.
Firms typically have several options when it comes to financing, including borrowing from a bank, issuing bonds, and issuing stock. Each of these choices has its advantages and disadvantages, such as interest commitments for loans and bonds, and loss of control and responsibility to shareholders when issuing stock. The key for a firm is to match its financing type with its operational needs and investment strategy, ensuring that it can continue to make real investments and thrive in the long term.
It's important to distinguish between the short run and the long run in a firm's operations. In the short run, a firm cannot change the use of fixed inputs, while in the long run, it can adjust all factors of production. This means that long-term investments are planned to align with the capacity for adjustment and growth over time.