CFA Level I · CFA Level I Exam · Working Capital and Liquidity
A manufacturer's treasurer says the firm's primary working capital objective is to ensure the company can meet its short-term obligations while keeping the funds tied up in operations as low as is practical. This objective is best described as managing:
The objective is best described as managing the trade-off between liquidity and profitability. A firm needs enough current assets to pay obligations on time, but excess balances earn low returns and cost funding, so management seeks the lowest practical investment that still protects liquidity.
- Aonly the cash account balance
- Bthe trade-off between liquidity and profitabilityCorrect
- Clong-term debt maturity to reduce refinancing risk
Explanation
Working capital management balances liquidity, meaning the ability to pay bills, against the cost of funding idle current assets, which lowers returns. It covers more than cash and focuses on the short term, not long-term debt maturities.
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