Chapter 4 Flashcards
concerns the determination of the optimal mix, and use of current assets and current liabilities
working capital finance
the objective is to minimize the cost of maintaining liquidity while guarding against the possibility of technical insolvency
working capital finance
the current assets needed at the low point of the business cycle
permanent current assets
financing policies
moderate approach (maturity matching)
aggressive approach
conservative approach
matching assets and liability matures
moderate approach
it is financed with long-term capital
fixed assets and permanent current assets
it is financed with short-term debt
temporary current assets
hurdles to exact maturity matching
uncertainty about the lives of assets
the use of common equity
has no maturity
common equity
financing of some of its permanent assets with short-term debt
agressive approach
in this approach, management keeps the investment in working capital at a minimum
agressive approach
this policy maximizes return on investment at the price of the risk of minimal liquidity
agressive approach
are generally lower than long-term rates
short term rates
financing long term assets with short-term debt is
risky
it is used to finance all the permanent assets and to meet some of the seasonal needs
long-term capital
the firm uses a small amount of short term credit to meet its peak requirements, but it also meets part of its seasonal needs by
sorting liquidity in the form of marketable securities
this policy minimizes liquidity risk by increasing net working capital
conservative approach
it is characterized by a higher current ratio and acid test ratio
conservative working capital
this policy finances assets using long-term or permanent funds rather than short-term sources
conservative approach
