PRC-3 · Chapter 4 · Question 62 of 65
A firm uses a high-interest, 6-month bank overdraft to purchase a heavy manufacturing machine that will take 10 years to generate enough profit to pay for itself. What severe financial risk has the firm created?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Asset-liability mismatch
Explanation
Using short-term finance to fund long-term assets creates a dangerous asset-liability mismatch, leading to severe liquidity crises when the short-term debt becomes due immediately.
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