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My reason for aswering B for question 30 is following
The firm is expecting a higher return due to using the short term loan to allow them to purchase more from a supplier at a lower cost. Once the product is sold at the regular price and the revenue comes in the loan can be paid off and the firm wil have a higher cash in flow.
(SHORT TERM FINANCING/LOW LIQUIDITY)
If you adopt a financing plan which uses short term funds, and your asset liquidity is low then it is an aggressive and risky approach for the following reasons:
1. Profit factor - There is a possibility of high profits because your assets are less liquid and therefore well invested in the business.
2. Profit factor - You are using short term financing and hence the interest costs could be low resulting in lesser interest expense thereby helping profits.
3. Risk Factor - Since the financing is short term there is every possibility that the interest rates could go up resulting in a higher interest expense when the finances need to be renewed or the lender may refuse to renew.
4. Risk Factor - Since the assets are less liquid there may not be enough cash to meet short term obligations.