ON OPTIMAL FINANCING OF CYCLICAL CASH NEEDS

THE PURPOSE OF THE ARTICLE DISCUSSED WAS TO DETERMINE THE OPTIMAL MIX OF SHORT-AND LONG-TERM BORROWING TO FINANCE CYCLICAL CASH NEEDS, AND TO DO A COMPARATIVE STATIC ANALYSIS OF HOW THE OPTIMAL MIX VARIES WITH THE SHAPE OF THE CYCLE AND THE INTEREST-RATE STRUCTURE, WITH RATES ASSUMED CERTAIN BUT POSSIBLY VARYING OVER TIME. THE EXTREME SOLUTIONS OF FINANCING EITHER ENTIRELY BY LONG-TERM DEBT OR SHORT-TERM DEBT APPEAR AS CORNER SOLUTIONS, AND ONLY BY COINCIDENCE CAN AN AMOUNT OF LONG-TERM BORROWING EQUAL TO AVERAGE CASH NEEDS BE OPTIMAL. THUS THE PRESUMPTION OF MANY AUTHORS THAT ALL BORROWING TO MEET SHORT-TERM CYCLICAL CASH NEEDS WILL BE SHORT-TERM IS QUITE UNLIKELY TO BE OPTIMAL. IF INSTITUTIONAL ARRANGEMENTS AND CUSTOMARY RULES OF THUMB INHIBIT OF PROHIBIT LONG- TERM BORROWING TO MEET SHORT-TERM NEEDS, IT IS CLEAR THAT NONOPTIMAL RESULTS WILL FOLLOW UNDER A WIDE RANGE OF ASSUMPTIONS. GRAPH.