Dyv

Policy R

Total asset requirement

Short-term

Policy R

Total asset requirement

Short-term

Long-term financing

Policy R uses long-term financing for permanent asset requirements only and short-term borrowing for seasonal variations.

cycled back down. This approach is the restrictive policy illustrated in Figure 19.5 as Policy R.

In comparing the two strategies illustrated in Figure 19.5, notice that the chief difference is the way in which the seasonal variation in asset needs is financed. In the flexible case, the firm finances internally, using its own cash and marketable securities. In the restrictive case, the firm finances the variation externally, borrowing the needed funds on a short-term basis. As we discussed previously, all else being the same, a firm with a flexible policy will have a greater investment in net working capital.

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