Question

What are the current asset financing strategies that firms adopt?

Suppose a firm wants to take advantage of an upward-sloping yield curve. If the firm believes that interest rates will stay constant and it wants to use the current yield curve to bolster profits, which approach should the firm follow?

Conservative approach

Aggressive approach

Maturity matching approach

Suppose a firm occasionally faces demand for short-term credit but usually has an excess of short-term capital to finance current assets. Which approach is the firm following?

Conservative approach

Maturity matching approach

Aggressive approach

Which usually costs less—short-term or long-term debt?

Long-term debt

Short-term debt

Answer 1

1)The current asset financing strategies the firm adopt are as follows:

1. Conservative approach: Under this poilcy firm finance it's permanent and part of temporary asset with the long term debt as it is less risky. If the firm has no temporary current asset, then liquidity can be maintained by investing in marketable securities.
2. Aggressive policy: When a firm finance part of its permanent asset with the short-term debt and rely more on short-term financing, it is known as aggressive approach. This approach is very risky due to reliance on short-term financing.
3. Matching approach: Matching approach means that company is financing its permanent current asset with long term debt and temporary current asset with short term debt. Thus, this approach is not risky as if there is no temporary asset there is no need of short term financing.

2) Answer is Aggressive approach

The reson for choosing this option is that upward sloping curve indicates that short term rates are lower than long term rates. So he prefers to take short term loans.

3) Answer is conservative approach

The reson for choosing this option is that firm finace its fixed and permanent assets with long term loans and temporary current asset with short term loans. Thus, the firm chose conservative approach.

4)Answer is short term debt

The reason is that short term debt are less riskier than long term debt.