A firm that employs an aggressive working capital financing policy stands to increase profitability when the yield curve changes from upward sloping to downward sloping.

Question

Quizplus · Accepted Answer

An aggressive working capital financing policy involves a higher level of short-term borrowing to finance current assets. In a downward-sloping yield curve environment, short-term interest rates are generally higher than long-term rates. Therefore, a firm that employs an aggressive working capital financing policy would face higher borrowing costs, which would likely decrease profitability. Conversely, when the yield curve changes from downward sloping to upward sloping, short-term borrowing costs usually decrease relative to long-term borrowing costs, which could increase profitability for a firm with an aggressive working capital financing policy.

A Firm That Employs an Aggressive Working Capital Financing Policy