The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Question

Quizplus · Accepted Answer

An aggressive working capital financing policy involves using short-term debt to finance current assets, and therefore is sensitive to changes in interest rates. When the yield curve is upward sloping, short-term rates are lower than long-term rates, making it cheaper to finance current assets with short-term debt. However, when the yield curve shifts to being downward sloping, short-term rates become higher than long-term rates, which means that the cost of financing current assets with short-term debt increases. This would decrease the relative profitability of a firm using an aggressive working capital financing policy.

The Relative Profitability of a Firm That Employs an Aggressive