Identify and explain three alternative current asset investment policies.

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Identify and explain three alternative current asset investment policies.

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Identify and explain three alternative current asset investment policies.

Explanation & AnswerSolution by a verified expert

Explanation

A relaxed investment policy results in low asset turnover and therefore low ROE.  A firm with this policy may seek higher profit margins to make up the difference.
 
A restrictive investment policy is a higher risk strategy as the firm subjects itself to shortages and work stoppages.  A firm with this policy may emphasize high inventory turnover.

Verified Answer

The following are examples of alternative current assets investment policies: Relaxed Investment Policy, Restricted Investment Policy, Moderate Investment Policy.
 
A firm with a relaxed investment policy maintains a large amount of current assets and a liberal credit policy which creates a high level of receivables.
 
A firm with a restrictive investment policy maintains a low level of current assets.  This results in a high asset turnover and therefore a higher ROE.
 
A firm with a moderate investment policy would be in between relaxed and restrictive.

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