ne n/af/servlet/quiz?ctx-ream-0057&quiz; action-takeQuiz& quiz probGuid-ONA COA8

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ne n/af/servlet/quiz?ctx-ream-0057&quiz; action-takeQuiz& quiz probGuid-ONA COA8010100000041ebc6200700008ck-m 153309 working capital Management Graded Assignment | Read Chapter 15 | Back to Assignment Due Thursday 08.02.18 at 11:45 PM Attempts: | 2-1 Keep the Highest: 24 4. Current asset financing policies Aa Aa Firms manage a variety of curren 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 t assets. Permanent current assets are necessary for firms to maintain thein Use the following table to identify the different current asset financing policies. Description Financing Policy Long-term capital finances ali fixed assets and the nonseasonal portion of current assets, and short-term loans finance seasonal needs of current assets Long-term capital finances all permanent current assets and some temporary financing needs. This current asset financing policy exposes the firm to the greatest amount of risk from rising interest rates and loan renewal problems Why does the conservative approach tend to be less profitable than the other current asset financing policy approaches? O All current asset financing approaches have the same potential profitability O Short-term debt is usually cheaper than long-term debt. O Taking out long-term debt tends to be more profitable than taking out short-term debt Flash Payer wIN 30,0,0,134 Q2 34 .2 © 2004 , 2016 Apiu. A. nghts reserved. rade it Now 9

Explanation / Answer

Drop Down Answers:

1. Maturity Matching Approach - In this type of financing policy, long term assets are financed with long term financning options and short term or current assets are financed with short term financing.

2. Conservative Approach - In this type of financing policy, short term assets are also financed with long term financing options. This makes it very much free of risk (though cost is slightly higher as long term debt is costlier).

3. Aggressive Approach - This approach adds a lot of risk, as in this, short term financing options are used to finance long term assets. This marks the company for a severe stress in case of any adverse interest rates movesments.

Multiple Choice Question

Short term debt is usually cheaper than long term debt. As explained above, long term debt is costlier. This is because of higher risk of default associated in the long term debt (debt held for a longer time will have higher risk of default than debt held for a smaller time period... Remember maturity risk premium)

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