CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management
Which of the following is a feature of an aggressive working capital financing policy?
An aggressive policy finances part of permanent current assets with short-term funds. This lowers financing cost and raises expected return, but it increases liquidity and refinancing risk. Matching maturities is the hedging approach, while long-term funding of fluctuating assets is conservative.
- AFinancing part of permanent current assets with short-term fundsCorrect
- BFinancing all fluctuating current assets with long-term funds
- CHolding large cash balances for safety
- DMatching each asset with a financing source of equal maturity
Explanation
An aggressive policy uses short-term funds even for part of permanent current assets, raising profitability but also risk. Matching is the hedging approach, and financing fluctuating assets with long-term funds is conservative.
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