Discussion - Permanent and Temporary Assets:

Following are levels of permanent assets and temporary assets for each month.

Permanent Assets and Temporary Assets for Each Month

January February March April

Current Assets 20,000 30,000 20,000 20,000

Fixed Assets 50,000 50,000 50,000 50,000

Permanent Assets 70,000 70,000 70,000 70,000

Temporary Assets 0 10,000 0 0

A flexible policy would finance $80,000 with long-term debt and have excess cash of $10,000 to invest in marketable securities in January, March, and April. Overall, the interest expense on the extra $10,000 borrowed long-term will outweigh the interest received from the marketable securities.

A restrictive policy would finance $70,000 with long-term debt. In February, the firm would borrow $10,000 on a short-term basis to cover the cost of temporary assets in that month.

The short-term loan would be repaid in March. Which policy would be most effective for this firm- the flexible or restrictive?

Provide a response, justifying it with what evidence you believe would be the most convincing.