Skip to content

CFA Level I · CFA Level I Exam · Working Capital and Liquidity

A company with highly seasonal sales holds minimal cash and relies heavily on a committed bank line of credit to fund temporary working capital needs. Compared with holding large cash reserves, this approach most likely:

This approach most likely exposes the firm to refinancing and availability risk if credit conditions tighten. Relying on a credit line reduces idle cash and its opportunity cost, but liquidity then depends on lenders honoring the facility, so the firm must still actively manage liquidity sources.

  1. Araises the opportunity cost of idle balances
  2. Bexposes the firm to refinancing and availability risk if credit conditions tightenCorrect
  3. Celiminates the need for any liquidity management

Explanation

Using a credit line instead of cash reserves lowers the idle-cash opportunity cost but makes liquidity depend on lender availability and terms, so tighter credit conditions create risk. It does not remove the need to manage liquidity.

Did you get it right without looking?

One question tells you little. A timed set on Working Capital and Liquidity shows your real accuracy, how long you take and where you lose marks.

Practise Working Capital and LiquidityFree diagnostic mock

More Working Capital and Liquidity questions