Identify the different current asset financing policies

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Reference no: EM131901867

1. Considering all else remains constant, if a firm is using a relaxed policy of financing assets, it will have a low / high level of assets, a low / high assets turnover ratio, and consequently, a high / low return on equity.

2. Firms manage a variety of current assets. Permanent current assets are needed for the firm to maintain its business, and they will be carried even through downturns in business cycles. Temporary current assets fluctuate seasonally or with business cycles. Each firm must devise a financing strategy that best fits its business situation and best manages its risk.

Use the following table to identify the different current asset financing policies:

a) Long-term capital finances all permanent current assets and some temporary financing needs. - Conservative approach / maturity matching approach / Aggressive approach

b) All fixed assets and the nonseasonal portion of current assets are financed with long-term capital, and seasonal needs of current assets are financed with short-term loans. - Conservative approach / maturity matching approach / Aggressive approach

c) Some portion of fixed assets and the nonseasonal portion of current assets are financed with long-term capital, and all seasonal needs of current assets and the remaining portion fixed assets are financed with short-term loans. - Conservative approach / maturity matching approach / Aggressive approach

3. Cash is considered an idle asset because it does not earn interest. Good financial management requires a firm to hold a limited amount of cash, but it is important for the firm to hold sufficient cash so that it can pay its current obligations, maintain its credit rating, and meet its unexpected cash needs.

The following statement refers to a type of cash balance. Select the best type of cash balance to complete the sentence - A transactions / speculative / Precautionary / partAcorrect cash balance is required by many banks that perform services for the firm.

4. Consider the following case:

Imagine that Miami Fabricators Inc. is a manufacturing company. Miami's chief financial officer is concerned about the risk of fluctuations in the latest cash forecast that was prepared for Miami. To mitigate the risk, the CFO has increased the cash balance on hand as a type of safety net if the forecast is not met.

What type of cash balance is this?

Speculative

Transactions

Precautionary

Compensating

5. Green Moose Industries buys most of its raw materials from a single supplier. This supplier sells to Green Moose on terms 1/10, net 60. The effective annual rate (EAR) of the supplier's trade credit is 9.92% / 9.44% / 6.40% / 8.00%

Reference no: EM131901867

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