Financial Management: Principles and Applications, 13/e

Chapter Summaries

18.1 Describe the risk-return tradeoff involved in managing a firm’s working capital. (pgs. 578–579)

Summary:

Working-capital management involves managing the firm’s liquidity, which, in turn, involves managing the firm’s current assets and its current liabilities. Each of these areas involves risk-return tradeoffs. For example, investing in current assets reduces the firm’s risk of illiquidity at the expense of lowering its overall rate of return on its investment in assets. Furthermore, reducing the use of short-term sources of financing by using more long-term sources enhances the firm’s liquidity but reduces the firm’s profitability.

Concept Check 18.1

1. How does investing more heavily in current assets, other things ...