Question

What does it mean to adopt a maturity matching approach to financing assets, including current assets? How would a more aggressive or a more conservative approach differ from the maturity matching approach, and how would each affect expected profits and risk? In general, is one approach better than the others? Use your industry for illustration.

Answer 1

The maturity matching approach calls for matching asset and liability maturities. A more aggressive financing approach would involve financing some of its permanent assets w/ short-term debt. A more conservative financing approach would involve financing all permanent current assets as well as some of its seasonal needs with long-term capital. In this situation, the firm uses a small amount of short-term credit to meet its peak requirements, but it also meets a part of its seasonal needs by storing liquidity in the form of marketable securities. The aggressive approach is the riskiest of all these approaches b/c if the firm encountered temporary financial problems, the lender might not renew its loan. However, because the yield curve is normally upward sloping, short-term interest rates are lower than long-term rates, thus would lead to higher profits. The conservative approach is the least risky but it is also the least profitable of the three approaches but the company should base it on risks involved.