Can you think of situations in which it would be advisable for an otherwise prudent firm...

Can you think of situations in which it would be advisable for an otherwise prudent firm to deviate from the principle?

Expert Solution

Usually prudent firms finance their current assets with short term liabilities and their fixed assets with long term liabilities. This is known as the maturity matching principle and helps prudent firms to save on its interest costs, reduce its refinancing risk and insulate itself from interest rate fluctuation risk.

A situation in which it will be advisable for an otherwise prudent firm to deviate from the principle will be a situation in which it is not possible for the firm to realize its assets on time. When assets are not realized on time the firm will not be able to extend its loan due dates to an unreasonable extent. When this happens the maturity principle will have to be ignored and the firm will have to adopt an approach that is opposite of the maturity matching principle. Many a times high degree of uncertainty exists on current asset’s side. The exact payment time by a debtor cannot be predicted. During such situations it will be advisable for an otherwise prudent firm to deviate from the maturity matching principle.

jeff jeffy answered 2 years ago

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