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CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital

A manufacturing firm finances all of its fixed assets, permanent current assets and part of its fluctuating current assets with long-term funds, and uses short-term borrowing only for the remaining peak seasonal needs. Which working capital financing policy is this?

This is a conservative policy, because long-term funds finance fixed assets, permanent current assets and even a portion of fluctuating current assets. Short-term debt is used only for peak needs. This lowers liquidity risk but raises financing cost, unlike matching or aggressive approaches.

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

Explanation

When long-term funds finance even part of the fluctuating (temporary) current assets, the firm is following a conservative policy. It carries lower risk and higher cost. Under a matching policy, long-term funds would cover only permanent needs, and an aggressive policy would use short-term funds even for part of permanent needs.

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