Page 6 1 aggressive strategy the aggressive strategy

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1. Aggressive Strategy The aggressive strategy is basically a maturity matching strategy. Using this strategy, the financial manager chooses to match the maturity of the source of financing with the duration of the need of cash. The wavy line represents the total assets of the firm overtime. Over the course of the firm’s operating activities, total assets rise and fall due primarily to fluctuations in receivables, inventory, and payables over the working capital cycle. The wavy line will exhibit an upward trend if the firm if growing and adding to its fixed assets base. In this case, the firm is maximizing its reliance on short-term financing and minimizing its reliance on permanent or long-term financing. The corporation’s net working capital position, as a result, is minimal because of the heavy reliance on short-term financing, and therefore the solvency position of the firm, as measured by the current ratio, will suffer. Pros: During normal financial conditions, short-term sources of financing cost less than longer-term sources. Cons: There is normally a trade-off of a lower financing cost at the expense of a reduced solvency level. 2. Conservative Strategy The conservative financing strategy uses only long-term sources to fulfill all the corporation’s financing needs. As total assets increase as a result of a build-up of inventory and receivables, the firm draws down its excess liquidity stored in short-term investments. Then as inventory is sold and receivables are collected, excess cash is reinvested in short-term investments. Thus, over a part of its working capital cycle, the corporation has an excess solvency position, as indicated by a relatively high current ratio. Pros: Because the corporation uses no short-term financing, it would have substaintial financing flexibility in acquiring new short-term sources of financing if it underestimated its actual future cash needs. However, the reliance on longer-term sources doeas provide a greater solvency position as measured by the current ratio. Cons: Under normal financial market conditions, this strategy would be relatively expensive because long-term financing sources are generally more expensive than short-term sources. 3. Moderate Strategy (Hedging Strategy) The moderate financing strategy is a blend of the aggressive and conservative strategies. The exact blend of short- and long-term depends on the risk preferences of the corporation as well as the current financial market conditions. IV. Differences between short-term financing alternatives: Short-term financing alternatives Purpose Issued Denomination Maturity Page | 7
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Line of credit Line of credit is a pool of money available for borrowing. These loans have a maximum limit, and borrowers have the option of borrowing up to that limit (or nothing at all). Borrow when convenient: Once approved, you can generally borrow whenever you need to.
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