FIN3702 ASSIGNMENT 2
SOLUTIONS
TUTORING FOR FAC,MAC,ECS,STA,DSC,TAX, FIN
,INV,QMI, BNU,MNG,MNB,BSM, CLA
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EMAIL:
, 1.4 Validity of the assumption: “Sales are independent of current asset
policy”
This assumption is NOT valid in practice.
Under a tight policy (low current assets relative to sales), the firm holds less inventory and may have
stricter credit terms. This can lead to stock‑outs, lost sales, and lower customer satisfaction → actual
sales are likely less than projected.
Under a relaxed policy (high current assets), the firm can hold more inventory, offer generous
credit, and maintain higher cash balances → this can stimulate sales above the forecast.
Therefore, the level of expected sales is not independent; the choice of current asset policy directly
influences achievable sales. The assumption simplifies calculations but ignores real‑world feedback
effects.
1.5 Overall riskiness of the firm under each policy
Policy Risk Level Explanation
Low liquidity, higher probability of
cash shortages, stock‑outs, and
Tight (Aggressive) Highest financial distress. Small errors in sales
or costs can cause severe liquidity
problems.
Balances liquidity and profitability.
Moderate Medium Some buffer against unexpected
events, but not fully protected.
High liquidity, large current assets,
easy access to cash. Low risk of default
Relaxed (Conservative) Lowest
or operational disruption, but at the
cost of lower ROE.
Conclusion: There is a clear risk‑return trade‑off – higher expected ROE (tight policy) comes with
higher risk, while lower ROE (relaxed policy) offers greater safety.
SOLUTIONS
TUTORING FOR FAC,MAC,ECS,STA,DSC,TAX, FIN
,INV,QMI, BNU,MNG,MNB,BSM, CLA
whatsapp me on+27737560989
EMAIL:
, 1.4 Validity of the assumption: “Sales are independent of current asset
policy”
This assumption is NOT valid in practice.
Under a tight policy (low current assets relative to sales), the firm holds less inventory and may have
stricter credit terms. This can lead to stock‑outs, lost sales, and lower customer satisfaction → actual
sales are likely less than projected.
Under a relaxed policy (high current assets), the firm can hold more inventory, offer generous
credit, and maintain higher cash balances → this can stimulate sales above the forecast.
Therefore, the level of expected sales is not independent; the choice of current asset policy directly
influences achievable sales. The assumption simplifies calculations but ignores real‑world feedback
effects.
1.5 Overall riskiness of the firm under each policy
Policy Risk Level Explanation
Low liquidity, higher probability of
cash shortages, stock‑outs, and
Tight (Aggressive) Highest financial distress. Small errors in sales
or costs can cause severe liquidity
problems.
Balances liquidity and profitability.
Moderate Medium Some buffer against unexpected
events, but not fully protected.
High liquidity, large current assets,
easy access to cash. Low risk of default
Relaxed (Conservative) Lowest
or operational disruption, but at the
cost of lower ROE.
Conclusion: There is a clear risk‑return trade‑off – higher expected ROE (tight policy) comes with
higher risk, while lower ROE (relaxed policy) offers greater safety.
