CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management
A firm follows an aggressive working capital financing policy. This means that it:
An aggressive policy finances part of permanent current assets with short-term funds, in addition to fluctuating needs. This lowers financing cost because short-term funds are cheaper, but it raises liquidity and refinancing risk compared with matching or conservative policies.
- AFinances all permanent current assets with long-term funds
- BFinances part of its permanent current assets with short-term fundsCorrect
- CHolds a high level of current assets to reduce risk
- DFinances all fluctuating current assets with equity capital
Explanation
An aggressive policy uses short-term funds not only for fluctuating current assets but also for part of permanent current assets. This lowers cost but increases risk of liquidity trouble and refinancing.
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