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Important information about Maturity Matching Principle

Explain why maturity matching principle is important when assessing the use of long-term versus short-term financing, and how a mismatch can be costly to an organization.

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Hello Student,

For this question, the first thing you may want to do is define what is the maturity matching principle; after which you may tell why it is important when assessing the use of long-term versus short-term financing and how a mismatch may be costly to any organization. Note the following excerpt:

The maturity matching principle states that short-term assets should be financed with short-term financing and long-term assets with long-term financing. Short-term or current assets include cash and inventory. Short-term financing sources include accounts payable and short-term loans. Long-term assets include buildings and equipment. Long-term financing sources include long-term debt, common stock and preferred stock. (Source: ...

Solution Summary

This solution first tells what is the maturity matching principle. It then gives reasons as to why the maturity matching principle is important when assessing the use of long-term versus short-term financing.

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