Question

Which of the following current asset financing policies reflects the decision to finance the peaks of current assets with long-term debt and equity that provides the firm with a surplus of cash and marketable securities most of the time, except during peak asset demand?

Answer 1

A conservative financing strategy reflects the choice to finance peaks in current assets predominantly with long-term debts and equity, keeping a cash surplus available except during peak demands.

Step-by-step explanation:

When considering a current asset financing policy that involves using long-term debt and equity to finance the fluctuations in current assets, including maintaining a surplus of cash and marketable securities for all times except during peak demand, the approach is typically referred to as a conservative financing strategy. This method opts for a lower risk tolerance, ensuring that a firm has adequate liquidity to meet its obligations, even at peak asset requirements. Financing with long-term sources rather than short-term debt allows the firm to avoid the risk of having to renew short-term loans under adverse conditions and provides stability to the company's financial structure.