Which statement best describes working capital financing policy?

A) Net working capital may be defined as current assets minus current liabilities, and an increase in the current ratio automatically indicates that net working capital has increased.
B) 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 strategy because of the inherent risks of using short-term financing.
C) If a company follows a policy of "matching maturities," this means that it matches its use of common shares with its use of long-term debt as opposed to short-term debt.

Question

Magda corneille · Accepted Answer

Final Answer : B, Explanation :  Working capital financing policy refers to the decision of how to finance a company's short-term assets and liabilities. The use of short-term debt is considered aggressive because of the risk of interest rate fluctuations and the need to continually refinance the debt. While an increase in the current ratio may indicate an increase in net working capital, it does not describe the financing policy of the company. Matching maturities refers to aligning the maturity of the assets and liabilities, but this statement does not provide enough information to determine if this is referring to the financing policy.

Definitions

Learning Objectives

Learning Objectives

Related questions