Question: (Hedging principle) A popular theory for managing risk to the firm that arises out of its management of working capital (that is, current assets and current liabilities) involves following the principle of self-liquidating debt. How would this principle be applied in each of the following situations? Explain your responses to each alternative
a. Longleaf Homes owns a chain of senior housing complexes in the Seattle, Washington, area. The firm is presently debating whether it should borrow short or long term to raise $10 million in needed funds. The funds are to be used to expand the firm's care facilities, which are expected to last 20 years.
b. Arrow Chemicals needs $5 million to purchase inventory to support its growing sales volume. Arrow does not expect the need for additional inventory to diminish in the future.
c. Blocker Building Materials, Inc. is reviewing its plans for the coming year and expects that during the months of November through January it will need an additional $5 million to finance the seasonal expansion in inventories and receivables.