1. What does working capital managementencompass? What functional decisions are involved, and what underlying principle or trade-off influences the decision process?
2. A firm is currently employing an "aggressive" working capital policy with regard to the level of current assets it maintains (relatively low levels of current assets for each possible level of output). The firm has decided to switch to a more "conservative" working capital policy. What effect will this decision probably have on the firm's profitability and risk?
3. Utilities hold 10 percent of total assets in current assets; retail trade industries hold 60 percent of total assets in current assets. Explain how industry characteristics account for this difference.
4. Distinguish between "temporary" and Permanent" working capital.
5. If the firm adopts a hedging (maturity matching) approach to financing, how would it finance its current assets?
6. Some firms finance their permanent working capital with short-term liabilities (commercial paper and short-term notes). Explain the impact of this decision on the profitability and risk of these firms.
7. Suppose that a firm finances its seasonal (temporary) current assets with long-term funds. What is the impact of this decision on the profitability of and risk of this firm?
8. Risk associated with the amount of current assets is generallyassumed to decrease with increased levels of current assets. Is this assumption always correct for all levels of current assets - in particular, for an excessively high level of current assets relative to the firm's needs? Explain.
9. At times, long-term interest rates are lower than short-term rates, yet the discussion in the chapter suggests that long-term financing is more expensive. If long-term rates are lower, should the firm finance itself entirely with long-term debt?