Answer to Question #6983 in Economics of Enterprise for LaMarcus Streeter

Question

3. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000

Answer 1

e. $320,000
Because with a moderate working capital financing policy, non-current assets and permanent current assets are financed with permanent finance and only the fluctuating current assets are financed with short term debt.
Fluctuating current assets are $410,000-$320,000 = $90,000. These assets are financed with short term debt. Other $320,000 is financed with permanent finance. And permanent finance is long-term debt plus equity capital.