Answer (D) is correct . Financing permanent inventory buildup, which is essentially a long-term investment, with long-term debt is a moderate or conservative working capital policy. An aggressive policy involves using short-term, relatively low-cost debt to finance the inventory buildup. It focuses on high profitability potential, despite high risk and low liquidity. An aggressive policy involves reducing liquidity and accepting a higher risk of short-term lack of liquidity. Financing inventory with long-term debt increases the current ratio and accepts higher borrowing costs in exchange for greater liquidity and lower risk.
Answer (A) is incorrect because Current liabilities, e.g., trade credit, is a major source of funds for small firms.
Answer (B) is incorrect because Liquid investments tend to have low returns.
Answer (C) is incorrect because Matching of asset and liability maturities is a moderate policy that minimizes risk. The expectation is that cash flows from the assets will be available to meet obligations for the liabilities.
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