An aggressive working capital policy aims to minimize current assets (like inventory) and maximize current liabilities. The primary financial risk is liquidity strain, but the most significant operational and strategic risk is stockouts. Running inventory too lean can disrupt production and fail to meet customer demand, leading directly to lost sales and long-term reputational damage, which outweighs the other more mechanical or temporary costs listed.

The cash conversion cycle (CCC) measures the time between paying for inventory and collecting cash from sales. Offering a discount for early payment (e.g., 2/10, net 30) incentivizes customers to pay sooner, which reduces the average collection period for accounts receivable. A shorter collection period directly decreases the CCC. Extending payment terms (B) would increase it. Eliminating credit checks (C) might increase bad debts and collection time. A larger discount (D) could accelerate payments but might be overly costly; the question asks for the change most likely to decrease the CCC, and A is a standard, effective tool for that purpose.

To minimize volatility in interest expense, the company should seek predictable, fixed costs. In a rising rate environment, floating-rate debt exposes the company to increasing expenses. Using interest rate swaps to convert floating-rate obligations to fixed-rate payments locks in the cost, providing budget certainty and directly achieving the goal of reducing volatility. Option A increases risk, C ignores a core treasury management function, and D (commercial paper) is typically short-term and floating-rate, which would increase volatility.

A fundamental principle of corporate finance is that a company creates value for shareholders when its returns (ROIC) exceed the cost of the capital used to generate those returns (WACC). A consistent positive spread is a key indicator of successful value creation. It does not, by itself, indicate that the capital structure is optimal (C), dictate dividend policy (D), or suggest value destruction (A, which is the case when ROIC < WACC).

While the IRR exceeds the hurdle rate, a marginally positive NPV indicates that the project’s excess returns above the cost of capital are minimal. This is a red flag that the project may not be as valuable as the IRR alone suggests, potentially due to overly optimistic cash flow projections, a long duration, or a high reinvestment rate assumption implicit in IRR. The prudent action is to scrutinize the underlying assumptions before proceeding. In corporate finance, NPV is generally considered the superior criterion as it directly measures value added in absolute terms.

The risk is that the euro will strengthen against the dollar, making the euro payment more expensive in USD terms. To hedge a known future foreign currency payment, the standard tool is a forward contract. The company would enter a forward contract today to buy the required euros in 90 days at a locked-in exchange rate, eliminating the uncertainty. Selling euro futures (A) would hedge a future euro receipt, not a payment. A euro put option (B) gives the right to sell euros, not buy them. Borrowing euros (D) creates a liability but doesn’t directly lock in an exchange rate for the future payment date.

The static trade-off theory posits that firms balance the tax advantages of debt financing against the costs of potential financial distress. The key benefit of debt in this model is the tax shield—the reduction in taxable income due to interest expense, which increases the value of the firm. While B and D can be secondary benefits, and A is more associated with equity, the core theoretical trade-off is specifically between the tax shield and distress costs.

An increasing DSO indicates that customers are taking longer, on average, to pay their invoices. When this trend diverges negatively from the industry, it strongly suggests internal issues such as lax credit standards for new customers, ineffective collection efforts, or selling to riskier clients. The first step is to investigate the accounts receivable aging report to identify which customers or segments are causing the delay and to review the terms being offered.

Equity investors require a higher rate of return than debt holders because their claim on the company’s assets and cash flows is residual (paid after all debts and obligations). This makes equity inherently riskier. Furthermore, equity returns are variable, not fixed. This fundamental risk-return relationship is the core reason for the higher cost of equity. The other theories (A, B, D) address different aspects of capital structure and payout policy but are not the primary explanation for this basic cost differential.

An aggressive working capital policy aims to minimize current assets (like inventory) and maximize current liabilities. The primary financial risk is liquidity strain, but the most significant operational and strategic risk is stockouts. Running inventory too lean can disrupt production and fail to meet customer demand, leading directly to lost sales and long-term reputational damage, which outweighs the other more mechanical or temporary costs listed.0