BFN 110 Lecture Notes - Lecture 25: Tunxis Community College, Liquidity Premium, Yield Curve
6 Jan 2021
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Document Summary
2 production alternatives in relation to sales: level production: Methods to smooth production schedules and used labor and equipment efficiently at a lower cost but leads to fluctuation in current assets: matching sales and production, Which eliminates the large seasonal bulges or sharp reduction. However, it is very difficult if not impossible to match sales and production perfectly. It is critical to control the fluctuation in in current assets current assets. Matching the maturities of assets and liabilities (the most desirable but almost impossible: conservative approach: Using long-term capital to finance capital assets, permanent current assets and part of temporary current assets (low risk but less profitable: risk approach: Using short-term funds to finance temporary current assets and part of permanent current assets (more profitable but risky) Short-term financing is less expensive but riskier. Long-term financing is more expensive but less risky lower interest rates (usually) Risk of default is sales slow down. Risks that banks may not extend/renew loans.
