In general, as a company increases the amount of short-term financing relative to long-term financing, the

Answer (A) is correct. An increase in the proportion of short-term financing will not affect a company’s degree of leverage, but risk is increased because of the need for frequent refinancing. Because the debtor company will be forced to meet principal and interest payments quickly, perhaps before expected funds from a new project, the danger of default is increased. Also, future interest rates are difficult to predict.