Pi Ltd. wants to keep more liquid assets so that it can meet its paym…

The correct answer is Option (4) → More long-term funds, even though long-term liabilities cost more than current liabilities.

Option (1) More short-term funds, as current liabilities cost less than long-term liabilities. — Incorrect. Current liabilities do cost less. But they fall due soon, so a firm that wants to keep more liquid assets raises more on a long-term basis.

Option (2) More long-term funds, as long-term liabilities cost less than current liabilities. — Incorrect. Long-term funds are the right choice here, but the cost is stated the other way round. Current liabilities cost less than long-term liabilities.

Option (3) More short-term funds, even though current liabilities cost more than long-term liabilities. — Incorrect. Both parts are wrong. A firm wanting liquidity raises more long-term funds, and current liabilities in fact cost less.

Option (4) More long-term funds, even though long-term liabilities cost more than current liabilities. — Correct. A firm that wants more liquid assets raises relatively more on a long-term basis. These funds cost more than current liabilities, so the firm gives up some profit to stay liquid. This is the choice between liquidity and profitability.