A ﬂexible short-term ﬁnancial policy:
A)increases the likelihood that a ﬁrm will face ﬁnancial distress.
B)incurs an opportunity cost due to the rate of return that applies to short-term assets.
C)advocates a smaller investment in net working capital than a restrictive policy does.
D)increases the probability that a ﬁrm will earn high returns on all of its assets.
E)utilizes short-term ﬁnancing to fund all of the ﬁrm's assets.

Question

Quizplus · Accepted Answer

A flexible short-term financial policy incurs an opportunity cost due to the lower rate of return that applies to short-term assets. It allows for a larger investment in net working capital and may increase the likelihood that a firm will face financial distress due to its reliance on short-term financing. However, it may also increase the probability that a firm will earn high returns on all its assets if managed correctly.

A ﬂExible Short-Term ﬁNancial Policy