Firms manage a variety of current assets. Permanent current assets are necessary

Question

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 Conservative approach Maturity matching approach Aggressive approach 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 Long-term capital finances some portion of the nonseasonal part of current assets, as well as all fixed assets, and short-term loans finance all seasonal needs of current assets and the remaining portion of nonseasonal current assets. 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 Maturity matching approach Aggressive approach O Conservative approach

Explanation / Answer

The Firm should use a Conservative Approach.
This is because an upward sloping yield curve implies a rise in interest rates.

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