Which of the following is not consistent with the \"hedgingprinciple\"? a. The t

Question

Which of the following is not consistent with the "hedgingprinciple"?
a. The time pattern of a financial liability should be set tomatch the time pattern of the cash flows generated by the assetbeing financed. b. A seasonal expansion should be financed with either aspontaneous or temporary source of financing. c. An example ofspontaneous financing is a short-term bank note. d. Preferred stock is an example of a permanent source offinancing. Which of the following is not consistent with the "hedgingprinciple"?
a. The time pattern of a financial liability should be set tomatch the time pattern of the cash flows generated by the assetbeing financed. b. A seasonal expansion should be financed with either aspontaneous or temporary source of financing. c. An example ofspontaneous financing is a short-term bank note. d. Preferred stock is an example of a permanent source offinancing.

Explanation / Answer

               TheHedging Principle involves matching the cash-flow-generatingcharacteristics of an asset with the maturity of the source offinancing used to finance the asset.   For Example: "X"Company's expansion of inventories of umbrellas, raincoats and rainboots during the rainy season and of sweaters, jackets and otherwarm clothing in winter should be financed using short-term loansor current liaibilities. This is because the funds are needed for alimited time, and after that the time has elapsed the cash neededto repay the loan would have been generated by the sale of theextra inventories.             Preferredstock is a long-term source of financing. It is not consistent withthe Hedging Principle. Thus, Answer is Option (d) Preferred stock is anexample of a permanent source of financing.

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