Question

At the extreme, a firm that adheres to the conservative approach to finance current assets will finance all of its seasonal needs with long-term financing alternatives, thereby eliminating the need to use short-term financing. Such a firm will have extra permanent funds during off-peak periods, allowing it to store liquidity in the form of short-term investments during the off-season.a) trueb) false

Answer 1

Answer:

The correct answer is A) True

Explanation:

Seasonal needs are short-term in nature. To service them using short-term funds would prove more expensive over the long run.

Long-term finance in most cases have the characteristics of being relatively cheaper than short-term finance.

Chief among the sources of short-term finance are:

• trade credits,
• Commercial Bank overdrafts
• Commercial paper, promissory note, and
• loans that are secured

Short-term finances are usually less than a year. Whilst long-term finances generally span over one year.

Examples of long term finances are:

• Equity Capital
• government debt
• Bonds
• Mortgages etc

Interest payable on long term debts are usually single-digit whilst those on short term loans are usually double-digit.

As indicated in the information provided, companies that keep extra "permanent" funds preserve its value by placing it in short term investments

Cheers!