Fundamentals of Financial Management Study Set 1
Quiz 15: Working Capital Management
The Three Alternative Current Asset Investment Policies Discussed in the Text
The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.
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The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.
A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.
Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing.
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