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Answer on Economics of Enterprise Question for LaMarcus Streeter

Question #6981
1. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):
Peak Off-Peak
Cash $ 50 $ 30
Marketable securities 0 20
Accounts receivable 40 20
Inventories 100 50
Net fixed assets 500 500
Total assets $690 $620
Payables and accruals $ 30 $ 10
Short-term bank debt 50 0
Long-term debt 300 300
Common equity 310 310
Total claims $690 $620
From this data we may conclude that
a. Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities.
b. Swim Suits' current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt.
c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.
d. Without income statement data, we cannot determine the aggressiveness or conservatism of the c
Expert's answer
The right answer is:
c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of
its short-term needs are met by permanent capital.

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Comments

Assignment Expert
10.04.2014 08:35

nypdog
09.06.2013 12:53

Answer is C. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.

Because in this situation, the firm uses a small amount of short term credit to meet its peak requirements, but it also meets a part of its seasonal needs by “storing Liquidity” in the form of marketable securities.

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