Question

- Graphically depict the three alternative current asset financing policies. Be sure to properly label the axes, types of assets, and types of financing.

Answer 1

Three alternative current Asset Financing policies:- Most businesses experience season al or cyclical fluctuations. For example, Construction firms bave peaked in the spring and summer, retailerts peaks around Christmas and the manufacturers who Supply both construction Companies and retailers follow Similar patterns. Similarly, virtually all businesses must build un correst assets when the economy is strong, but they then see off inventories and reduce receivables when the economy blacies off, Shill, current assets rarely drop to 2010 – Companies have some permanent Current Assets, which are current assets on hand at the low point of cycle. Then, as sales increase during the upswing, current assets must be increased & these additional current assets are defined as temporary current cosete. The manner in which the permanent & Temporary current assets are franced is called the firms luvent asser financing policy, CamScanner Scanned by CamScanner

Fig: Three Alternative current Asset financing powdes. Conserivative Strategy Hedging Strategy Temporary Working capitat sy Aggressive Strategy permanent Working Capital Fixed Assets Long term financing Cal Maturity Matching, (or) seef liquidating Approch: The Maturity matching approch calls for matching asset & liability maturities. This strategy minimizes the risk that the firm will be unable to pay off its matering obligations , b) Aggressive approch The Situation for a relatively aggressive firm which finances all of its fiaed assets with long term capital and part of its permanent correst assers with - Scanned with CamScanner Scanned by CamScanner

- short term, no spon taneous Credit. Note that we used the term "relatively” in the title for panel b because there can be different degrees of aggressiveness (c) Conser vative approch; The dashed line above the line designating permanent current assets indicating that permanent capital is being used to finance all permanent asset requirements and also to meet some of the seasonal needs. In this situation, the firm uses a small amount of short-term, Non Spontaneous Credit to meet its peak requirments but it albo meet sa part of its Beasonal neede by storing Uquidity in the form of Mourketable secorities. Scanned with CamScanner Scanned by CamScanner