Answer to Question #276128 in Financial Math for Anup

Question

Generation Next has Tk 2000 million of total asset of which Tk 990 million is fixed asset and the rest is current asset. 20% of currents assets are needed for temporary seasonal need and the rest is required year-round. If the company follows hedging approach in financing its working capital how much of long-term and short-term borrowing will the company have

Answer 1

Maturity matching or hedging approach is a strategy of working capital financing wherein we finance short term requirements with short-term debts and long-term requirements with long-term debts.

Long Term Funds will Finance = Fixed Assets + Permanent Working Capital

Short Term Funds will Finance = Temporary Working Capital

current assets=2000-990=1010

Permanent Working Capital=1010-202=808

$temporary seasonal need=0.2\times1010=202$

Long Term Funds will Finance = Fixed Assets + Permanent Working Capital=990+808=1798

Short Term Funds will Finance = Temporary Working Capital=202