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Chapter 8:   Overview of Working Capital Management

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1. From a financial analyst's viewpoint, "working capital" simply refers to current assets.

2. The optimal level of working capital is that which provides a 2:1 ratio of current assets to current liabilities.

3. Current liabilities (such as trade credit from suppliers) is an important source of financing for many small firms.

4. The hedging approach to financing involves matching maturities of debt with specific financing needs.

5. In general, long-term debt costs less than short-term debt.

6. All other things equal, reducing a firm's current assets will decrease profitability as measured by ROI.

7. In working capital management we find that profitability varies inversely with liquidity.

8. Generally, a greater margin of safety would be provided by more current assets and fewer current liabilities.

9. An aggressive working capital policy would have low liquidity, higher risk, and higher profitability potential.

10. Permanent working capital includes fixed assets.

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