Attempts: Keep the Highest: /4 4. Current asset financing policies Aa Aa Firms m

Question

Attempts: Keep the Highest: /4 4. Current asset financing policies Aa Aa Firms manage a variety of current assets. Permanent current assets are necessary for firms to maintain their businesses, and they will be carried even through downturns in business cycles. Temporary current assets fluctuate seasonally or with business cycles. Firms must devise a financing strategy that best fits their business situation and that best manages their risk. Use the following table to identify the different current asset financing policies Description Financing Policy Long-term capital finances all fixed assets and the nonseasonal portion of current assets, as well as seasonal needs of current assets Long-term capital finances some permanent current assets, but short-term debt finances all temporary current assets and the remaining permanent current assets This current asset financing policy finances current assets with liabilities that are expected to mature at the same time the current asset will be liquidated Aggressive approach Maturity matching approach Conservative approach Suppose a firm wants to take advantage of an upward-sloping yield curve. If the firm believes that interest rates will stay constant and it wants to use the current yield curve to bolster profits, which approach should the firm follow? O Conservative approach O Maturity matching approach O Aggressive approach

Explanation / Answer

1) Long-term capital finances all fixed assets and the nonseasonal portion of current assets, as well as seasonal needs of current assets Maturity matching approach (also known as moderate working capital financing policy) This is so called, because in this approach maturity of the assets is matched with the maturity of the financing.

2) long-term capital finances some permanent current assets, but short-term debt finances all temporary current assets and the remaining permanent assets.   Aggressive approach (in this approach, mostly shot term financing is used to finance permanent assets)

3) This current asset financing policy finances current assets with liabilities that are expected to mature at the same time the current assets will be liquidated   Maturity matching approach   (this is same as 1)

4) Suppose a firm wants to take advantage of an upward-sloping yield curve. If the firm believes that interest rates will stay constant and it wants to use the current yield curve to bolster profits, which approach should the firm follow? Aggressive approach

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