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cengage MindTap-Cengage Lea: × C ng cengage.com/static/nb/ui/inde html?nbld 5932918 bN deld:216270947&eISBN-9781305635975; MINDTAP Assignment 15-Working Capital Management Due Tomorrow at 1 1 PM EST 2. Current asset investment policies On the surface, it seems that a firm would want to hold high levels of current assets to ensure its liquidity and its ability to meet all of its short-term obligations. However, current assets are not very productive and generate very low returns when held. Therefore, a firm must strike a balance and hold those types and quantity of current assets that work best for it. In the following table, identify which current asset investment policy is most likely to work best for each firm. Current Asset Investment Policy Moderate Relaxed Restricted Spendthrifts Industries is a mature firm that has reliable funding sources and strong, stable cash flows. It places a higher value on avoiding current asset shortages than it does on minimizing the cost of holding current assets Monumental Pictures Inc. uses a current asset investment policy that gives a balanced cash conversion cycle between extremely long and extremely short. Gadgetmakers Inc. is a relatively young technology firm that is slightly past the startup stage but still faces significant capital constraints that do not allow any overinvestment in current assets. Consequently, the firm must be careful about how it invests its funds 0 Type here to searchExplanation / Answer
Answer 1)
EXPLANATION:-A restricted or agressive current asset investment policy , also known as a lean and mean policy ,calls for holding the lowest level of current assets that the firm can manage.This policy generally provides the highest expected return on investment , however it also has the greatest risk.It also tends to reduce the inventory conversion and receivables collection periods which would result in a relatively short cash coversion cycle.In terms of a firms life cycle, it is logical to think that a young firm with capital constraints would use the relaxed or agressive current asset investment policy , because it doesnt have excess capital to invest in current assets.
In contrast, a relaxed or conservative current asset investment policy ,also called a fat cat policy ,exists when a firm holds an abundance of current assets to ensure that a shortgae exists. This policy tends to be employed by fully mature firms that have excess free cash flows and it relies on inventory and receivables management policies that increase the firms inventory conversion and receivables collection periods .The end result is a longer cash conversion cycle.
In between these two policies is a moderate current asset investment , which seeks to optimize current asset holdings by balancing the cost of holdings current assets with the potential costs of shortages.A moderate policy will produce a cash conversion cycle somewhere between the aggressive and conservative policies.
Answer 2) Moderate Policy is the best policy of firm for financing the assets.(Explained already)
Answer 3) The firm has excess capital to invest in cash ormarketable securities.
SPENDTHRIFTS INDUSTRIES RELAXED MONUMENTAL PICTURE INC MODERATE GADGET MAKERS INC RESTRICTEDRelated Questions
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