Which one of the following statements about working capital trade-off is NOT true?
A) Financial managers need to balance shortage costs against carrying costs to find an optimal strategy.
B) If carrying costs are smaller than shortage costs, then the company will maximise value by adopting a more restrictive strategy.
C) If shortage costs dominate carrying costs, the company will need to move toward a more flexible policy.
D) Management will try to find the level of current assets that minimises the sum of the carrying costs and shortage costs.

Question

Quizplus · Accepted Answer

If carrying costs are smaller than shortage costs, it would not make sense for the company to adopt a more restrictive strategy as they would incur higher costs due to shortages. Therefore, the company would maximise value by adopting a more flexible strategy.

Which One of the Following Statements About Working Capital Trade-Off