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the question states:
Which statement best reflects an aggressive working capital finance policy?
-More short-term finance is used because it is cheaper although it is risky.
– Investors are forced to accept lower rates of return.
– More long-term finance is used as it is less risky.
– Inventory levels are reduced.
the answers shows the correct answer to be the first option. why is it so?
and why is the last option of (inventory levels are reduced) not correct as it is also a aggressive policy
The financing policy is looking at how the finance is being raised – whether short-term (aggressive) or long-term (conservative). The first option is certainly correct.
Reducing inventory levels is something all companies should consider but is nothing to do with how the finance itself is being raised.
I do discuss the financing of working capital in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.