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RELAXED POLICY

• HAS RELATIVELY LARGE AMOUNTS OF CASH, MARKETABLE
SECURITIES AND INVENTORIES.
• SALES ARE SIMULATED BY GRANTING LIBERAL CREDIT TERMS
• IN LEVEL OF ASSETS= TOTAL ASSET TURNOVER=
ROE
• MOST APPROPRIATE WHEN CARRYING COST ARE LOW RELATIVE
TO SHORTAGE COST
RESTRICTED POLICY
•TIGHT OR “LEAN-AND-MEAN” POLICY
•CURRENT ASSET HOLDINGS ARE MINIMIZED
• CURRENT ASSETS= TURNOVER= ROE
• FIRM IS EXPOSED TO RISK
MODERATE POLICY

•LIES BETWEEN TWO EXTREMES
•FIRM WILL HAVE JUST ENOUGH CURRENT ASSETS
• MARGINAL CARRYING COSTS = MARGINAL
SHORTAGE COSTS
HOW WORKING
CAPITAL MANAGEMENT
AFFECTS THE RETURN
ON EQUITY
• INVESTMENTS IN CURRENT ASSETS MUST BE FINANCED BY WAY OF
A COMBINATION OF DEBT OR EQUITY
• SALES OF VIRTUALLY ALL BUSINESS INCREASE WHEN THE
ECONOMY IS STRONG
• PERMANENT CURRENT ASSETS- CURRENT OPERATING ASSETS
EVEN AT LOW POINT OF THE BUSINESS
• TEMPORARY CURRENT ASSETS- CURRENT ASSETS THAT CHANGES
ACCORDING TO SEASONAL FLUCTUATIONS
FLEXIBLE FINANCING
POLICY • LONG TERM CAPITAL IS USED TO
FINANCE ALL PERMANENT AND
SEASONAL ASSETS
• USES SMALL AMOUNT OF SHORT
TERM CREDITS DURING ITS PEAK
• ALSO MEETS ITS SEASONAL NEEDS BY
“STORING LIQUIDITY” IN THE FORM
OF MARKETABLE SECURITIES
RESTRICTED FINANCING
POLICY • FINANCING WITH LONG-TERM DEBT
AND EQUITY BUT WILL HAVE TO
SEEK SHORT-TERM FINANCING FOR
ALL PEAK DEMAND
• LEAST CONVENIENT BECAUSE
INVOLVES SEEKING SOME LEVEL OF
SHORT-TERM FINANCING ALMOST
ALL OF THE TIME
COMPROMISE
FINANCING POLICY
• “SELF LIQUIDATING APPROACH”
CALLS FOR MATCHING ASSET AND
LIABILITY MATURITIES
• USES BOTH SHORT-TERM
FINANCING AND INVESTING AS
NEEDED
CHOOSING AMONG THE APPROACHES

1. MATURITY HEDGING
2. CASH RESERVES
3. RELATIVE INTEREST RATES
4. AVAILABILITY AND COST OF ALTERNATIVE FINANCING
5. IMPACT ON FUTURE SALES