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CS Executive · Corporate Accounting and Financial Management · Working Capital Management

A firm finances all of its permanent current assets and part of its fluctuating current assets with long-term funds, and meets only the balance of fluctuating current assets with short-term borrowing. Which working capital financing policy is this?

This is the conservative policy. Long-term funds finance permanent current assets plus part of the fluctuating current assets, so short-term borrowing is kept to a minimum. This lowers liquidity risk but raises financing cost, unlike matching, where long-term funds finance only permanent needs.

  1. AAggressive policy
  2. BConservative policyCorrect
  3. CMatching (hedging) policy
  4. DZero working capital policy

Explanation

Under a conservative policy, long-term funds cover permanent current assets and also a portion of fluctuating current assets, so short-term debt is used minimally. The matching policy would fund only permanent assets with long-term funds and fluctuating assets with short-term funds. Hence the described approach is conservative.

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