Word banks:

1. matching, relaxed, restricted

2. matching, relaxed, restricted

3. cannot, can

4. temporary, permanent, operating

5. temporary, permanent, operating

6. maturity matching, aggressive financing, conservative financing

7. moderate, aggressive, conservative

8. moderate, aggressive, conservative

9. moderate, aggressive, conservative

10. marketable, bond, stock

11. downward sloping, upward sloping, horizontal sloping

12. higher than, lower than, equal to

A firm's current asset levels rise and fall with business cycles and seasonal trends. There are three alternative policies regarding the level of current assets a firm holds. A -Select- investment policy means that relatively large amounts of cash, marketable securities, and inventories are carried, and a liberal credit policy results in a high level of receivables. A -Select- y investment policy means that the holdings of cash, marketable securities, inventories, and receivables are constrained. A moderate investment policy is an investment policy that lies between the two extremes. Changing technologies -Select- lead to changes in the optimal working capital investment policy. Current asset levels vary relative to seasonal and cyclical fluctuations and they rarely drop to zero. -Select- current assets are those current assets that a firm must carry even at the trough of its cycles. -Select- current assets are those current assets that fluctuate with seasonal or cyclical variations in sales. Investments in current assets must be financed. There are three alternative approaches for financing current assets. The -Select- , or "self- liquidating," approach is a financing policy that corresponds with the maturities of assets and liabilities. This represents a(n) -Select- y financing policy. A(n) -Select- financing policy is one in which a firm finances some of its permanent assets with short-term debt. A(n) -Select- financing approach means that a firm uses long-term capital to finance all permanent current assets and to meet some of the seasonal needs. With this approach the firm will use a small amount of short-term credit to meet its peak requirements, but it also meets part of its seasonal needs by storing liquidity in the form of -Select- v securities. Using short-term debt has both advantages and disadvantages over the use of long-term debt. Because the yield curve is normally -Select- v , the cost of short-term debt is generally -Select- v the cost of long-term debt. However, short-term debt is riskier to the borrowing firm for two reasons. First, the interest expense of short-term debt fluctuates widely compared to the interest expense on long-term debt which will be relatively stable over time. Second, if a firm borrows heavily on a short-term basis, a temporary recession may adversely impact its financial ratios and render it unable to repay this debt. If the firm's financial position weakens, the lender may not renew the loan which will force the firm into bankruptcy. In addition to its lower cost, a short-term loan can be negotiated more quickly than long-term loans. Finally, short-term debt offers greater flexibility than long-term debt. The relative benefits of short-term debt and long-term debt vary over time. So, it's not possible to state whether long-term or short-term financing is better than the other. The firm's specific financial conditions will affect the choice, as will the preferences of its managers