Skip to content

CS Professional · Strategic Management and Corporate Finance · Business Policy and Formulation of Functional Strategy

In formulating a financial strategy, a firm adopts a policy of matching the maturity of its financing with the life of the assets it funds, using long-term sources for fixed assets and short-term sources for temporary working capital. What is the main benefit of this approach?

Matching financing maturity with asset life reduces repayment and refinancing risk because asset cash flows coincide with when funds fall due, and it avoids bearing long-term financing cost for needs that are only temporary.

  1. AIt reduces the risk of being unable to repay financing when it falls due, while avoiding paying long-term cost for short-term needsCorrect
  2. BIt guarantees that the firm will never need external financing
  3. CIt eliminates the need for a dividend policy
  4. DIt ensures the firm's share price will rise every year

Explanation

Matching maturities means cash flows from assets arrive when the financing must be repaid, lowering refinancing and liquidity risk, and avoids idle long-term funds being costly. It does not remove the need for external finance, dividend decisions or guarantee price rises.

Did you get it right without looking?

One question tells you little. A timed set on Business Policy and Formulation of Functional Strategy shows your real accuracy, how long you take and where you lose marks.

Practise Business Policy and Formulation of Functional StrategyFree diagnostic mock

More Business Policy and Formulation of Functional Strategy questions