122k views
1 vote
A firm will usually increase the ratio of short-term debt to long-term debt when

A. short-term debt has a lower cost than long-term equity.

B. the term structure is inverted and expected to shift down.

C. the term structure is upward sloping and expected to shift up.

D. the firm is undertaking a large capital budgeting project.

User Bakar
by
8.1k points

1 Answer

2 votes

Final answer:

A firm is likely to increase short-term debt relative to long-term debt when short-term rates are high but expected to decrease, allowing the firm to refinance at a lower cost in the future.

Step-by-step explanation:

A firm will usually increase the ratio of short-term debt to long-term debt when the term structure of interest rates is inverted and expected to shift down, which is option B. This situation means that short-term borrowing costs are currently higher than long-term borrowing costs but are expected to decrease in the future. Firms might capitalize on this expectation by taking on more short-term debt currently, with the plan to refinance at a lower rate when the rates fall, thus reducing their overall borrowing costs over time.

User Baysmith
by
8.3k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.