Question

Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

 

a. $274,360

b. $260,642

c. $304,000

d. $320,000

e. $288,800

Answer 1

A maturity matching or a moderate working capital financing policy implies that the non-current assets as well as those current assets which are permanent in nature are being financed by permanent sources of finance while those current assets that are fluctuating in nature are being financed by short term debt only.

Now: as given in the question:the fluctuating current assets is given by: $410,000-$320,000 ie. $90,000.This $90,000 is being financed by short-term debt only.(This is because in the question it is given that the fixed assets remain constant at $260,000)

The remaining: $320,000($410,000-$90,000) is being financed by permanent sources of finance ie. debt and equity.

So the total long term debt plus equity capital is likely to be: $320,000

Hence:option (D) is the correct answer.