A popular theory for managing risk to the firm that arises out of its management of working capital involves following the principle of self-liquidating debt. Discuss how this principle applies to each of the following situations.
• Applewood Homes owns a chain of senior housing complexes and is presently debating whether it should borrow short or long term to raise $5 million in needed funds. The funds are to be used to expand the firm’s care facilities, which are expected to last 10 years.
• XYZ Chemicals needs $2 million to purchase inventory to support its growing sales volume. They do not expect the need for additional inventory to diminish in the future.
• HomeBake is making financial plans for the coming year and expects that during the months of November through January it will need an additional $5 million to finance the seasonal expansion in inventories and receivables.