2. Current asset financing policies

How do firms finance their operating current assets?

A firms asset or capital requirements grow over time and usually exhibit temporal (seasonal) variation. Firms must solve the challenge of how to finance their assets with a combination of short- and long-term financing. The following graph exhibits this relationship for a particular firm.

Which of the following best characterizes this firms policy of financing assets?

Moderate policy

Relaxed policy

Restricted policy

Note the shaded region on the preceding graph. Which of the following statements best describes the firms situation during this time?

The firm has excess capital to invest in cash or marketable securities.

The firm must rely on short-term borrowing.

The impact of working capital management on return on equity

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

DOLLARS Asset Requirements Long-term Financing TIME DOLLARS Asset Requirements Long-term Financing TIME