FIN622

FIN622 GDB Answer:

Following are the effect on the liquidity and profitability by moving from conservative working capital policy to aggressive working capital policy:-Conservative PolicyUse permanent capital for permanent assets and temporary assets.Aggressive Policy.Use short term financing to finance permanent assets.Effect on liquidity1. In aggressive policy the company will move to low level of investment in current asset so that the liquidity position also becomes low.2. In conservative policy the firm use some portion of long term debt to acquire temporary current assets as compared to aggressive policy the firm use short term finance debt to acquire temporary current assets as a result in aggressive policy the ratio become equal (low liquidity position as compared to conservative policy).3. Keeping in view of two above aggressive policies the company may be gone to a negative net working capital which is very risky.Effect on profitability1. Aggressive policy support low level of production & sales. As a result the profit will also low if there is not any good marketing tactics are used or the betterment of the quality of the product.2. Lender prefers high liquidity level but in aggressive policy the level of liquidity is low. The company cannot get short term finance for current assets. As a result the profit will also become low.