1. What does working capital management encompass? What functional decisions are involved, and what underlying principle or trade-off influences the decision process?

2. A firm is currently employing an aggressive working capital policy with regard to the level of current assets it maintains (relatively low levels of current assets for each possible level of output). The firm has decided to switch to a more conservative working capital policy. What effect will this decision probably have on the firms profitability and risk?

3. Utilities companies hold 10 percent of total assets in current assets; retail trade industries hold 60 percent of total assets in current assets. Explain how industry characteristics account for this difference.

4. Distinguish between temporary and permanent working capital.

5. If the firm adopts a hedging (maturity matching) approach to financing, how would it finance its current assets?

6. Some firms finance their permanent working capital with short-term liabilities (commercial paper and short-term notes). Explain the impact of this decision on the profitability and risk of these firms.