A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Question

Quizplus · Accepted Answer

An aggressive working capital financing approach uses short-term credit to finance current assets, leading to a higher level of interest rate risk. If interest rates increase, the cost of borrowing for short-term credit will increase, leading to higher financing costs for the firm. On the other hand, a conservative financing policy involves financing current assets with long-term capital, reducing the firm's exposure to changes in short-term interest rates.

A Firm That Follows an Aggressive Working Capital Financing Approach