Figure 18.4 – Total Asset Requirement Over Time

Figure 18.4 – Total Asset Requirement Over Time

• 18-

Choosing the Best Policy

• Cash reserves
• Pros – firms will be less likely to experience financial distress and are better able to handle emergencies or take advantage of unexpected opportunities
• Cons – cash and marketable securities earn a lower return and are zero NPV investments

• 18-

Choosing the Best Policy continued

• Maturity hedging
• Try to match financing maturities with asset maturities
• Finance temporary current assets with short-term debt
• Finance permanent current assets and fixed assets with long-term debt and equity

• 18-

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