Which of the following statements about working capital trade-off is true?
A) Financial managers need to balance shortage costs against carrying costs to find an optimal management strategy.
B) If carrying costs are greater than shortage costs, then the firm will maximize value by adopting a more restrictive strategy.
C) If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy.
D) All of the above

Question

Quizplus · Accepted Answer

Financial managers need to balance the costs associated with carrying too much working capital (carrying costs) against the costs associated with not holding enough working capital (shortage costs) in order to find an optimal management strategy. If carrying costs are greater than shortage costs, then the firm will maximize value by adopting a more restrictive strategy. On the other hand, if shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy. Therefore, all of the above statements are true.

Which of the Following Statements About Working Capital Trade-Off Is