A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with
A) common equity to avoid interest on a recurring annual need.
B) selling equipment.
C) trade credit.
D) long-term bonds since this is a recurring financing need.

Question

Quizplus · Accepted Answer

The hedging principle involves matching the financing tenure as closely as possible to the operating tenure of the assets being financed. Since the inventory build-up prior to Christmas is seasonal and temporary in nature, financing it with long-term bonds or common equity would be mismatched. Selling equipment could be an option but may not be feasible or optimal for the company. Trade credit, on the other hand, would provide short-term financing for a short-term need, making it the best choice in this scenario.

A Toy Manufacturer Following the Hedging Principle Will Generally Finance