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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

Sundaram Textiles needs to finance a permanent core level of current assets that remains in the business throughout the year. Which source is most consistent with the matching (hedging) approach?

Permanent working capital should be financed by long-term sources such as term loans or equity, because the matching approach aligns the maturity of funds with the duration of the asset. Short-term borrowings would require repeated refinancing and create liquidity risk.

  1. ALong-term sources such as term loans or equityCorrect
  2. BTrade credit obtained from suppliers for each purchase
  3. CBank overdraft renewed every quarter
  4. DCommercial paper issued for 90 days

Explanation

Under the matching approach, the maturity of finance is matched to the life of the asset. Permanent current assets last throughout the year, so they should be funded by long-term sources. Short-term sources such as overdraft or commercial paper would need constant refinancing and add risk.

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