A firm\'s asset or capital requirements grow over time and usually exhibit tempo

Question

A firm's 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. DOLLARS Long-term Financing Asset Requirements TIME Which of the following best characterizes this firm's policy of financing assets? O Restricted policy O Relaxed policy O Moderate policy Note the shaded region on the preceding graph. Which of the following statements best describes the firm's situation during this time? O The firm has excess capital to invest in cash or marketable securities. The firm must rely on short-term borrowing

Explanation / Answer

Answer: Moderate policy.

Restricted policy calls for long term financing for the permanent portion of assets and financing the seasonal variations through short term sources.

Relaxed policy finances the permanent portion of assets as well as a significant portion of the temporary requirements through long term sources, leaving the balance to be sourced through short term sources.

The moderate policy finances the average requirement of assets with long term sources and the balance through short term sources. In the figure, the variations on either side of the long term financing line are symmetrical, suggesting an average long term financing policy; ie: moderate policy.

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