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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Under an aggressive working capital financing policy, a firm will typically do which of the following?

An aggressive policy finances part of permanent current assets, besides fluctuating ones, with short-term funds. This lowers financing cost and raises expected return, but exposes the firm to higher refinancing and liquidity risk compared with a conservative or matching policy.

  1. AFinance part of its permanent current assets with short-term fundsCorrect
  2. BFinance all fluctuating current assets with long-term funds
  3. CHold large cash and marketable securities as a safety cushion
  4. DFinance all current assets entirely with equity

Explanation

An aggressive policy uses short-term finance even for part of permanent current assets, raising profitability but also liquidity risk. Options B, C and D describe a conservative approach.

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