ACCA FM · Chapter 5 · Question 8 of 10
Compared with an aggressive policy, which of the following is a consequence of adopting a conservative working capital funding policy?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Lower risk of liquidity problems but higher financing costs and lower profitability
Explanation
A conservative policy uses more long-term finance, which is more secure because it does not need frequent renewal, so liquidity risk is lower. However, long-term finance is usually more expensive than short-term finance, and some may be idle in periods of low activity, which reduces profitability.
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