- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 4. Working Capital and Liquidity
- Subject 3. Managing Working Capital and Liquidity
CFA Practice Question
A firm that employs a restrictive short-term financial policy will have a relatively ______.
A. low amount of short-term debt and a high ratio of current assets to sales
B. high amount of marketable securities
C. high amount of short-term debt relative to long-term debt
Explanation: A firm will tend to have a higher amount of short-term debt and a relatively low amount of current assets to sales under a restrictive policy. With a restrictive policy, a firm is less likely to have excess cash that must be invested in marketable securities.
User Contributed Comments 11
User | Comment |
---|---|
ManuB | What is a restrictive short term debt policy? |
sheenalim | and why does it have lower amt of assets relative to sales? |
migena | i think, the company is maintaining a strict policy of paying off short term debt before it can do anything else, i.e. spend in marketable securities or any other short term/current assets |
hlongoni | complementing migena - i believe the answer is due to the reason behind why the company is in a restrictive ST financial policy: probably for having large amounts of ST debt so that liquidate it became a priority |
mpapwa22 | Hlongoni...still don't get it..i had selected A. Maybe explain further. |
bahamas | it means the firm is restricting its debt policy to be strictly short term, so they will have more short term than long term |
MinS | thakns bahamas |
Thecatz | tricky like all questions of analystnotes... shot me please... |
czar | restrictive st policy means: restrict to keeping minimum cash on the books, so finance with short term debt instead of using cash... |
Mikehuynh | Such a tricky question! I interpreted "restrictive" wrongly, then went for B. Anyway, good question! Restrictive short-term financial policy = using more short-term debt, maintaining minimum cash. |
fberlinger | A restrictive short-term financial policy means a high proportion of short-term debt relative to long-term financing, and a flexible policy means less short-term debt and more long-term debt. |