Cash Management
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Please provide some reasons for holding cash? What might cause the cash balance to change? When does the cash balance tend to increase, decrease, or stay the same? Why? Please use appropriate examples to explain your position.
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Solution Summary
Reasons for holding cash are provided. What cause the cash balance to change is explained. When the cash balance tend to increase, decrease, or stay the same are explained.
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Reasons for holding cash
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Below are four reasons for holding cash:
1. Transaction Amounts
We have to hold enough cash to cover our outstanding payments or transactions. In addition to transaction amounts, we should add any compensating balances required under loan agreements. Therefore, the amount of cash on hand must be transaction amounts + compensating balances.
2. Precautionary Amounts
We need to maintain cash for unexpected disbursements. This is the precautionary amount of cash.
3. Speculative Amounts.
If we are anticipating making an investment, we will hold a speculative amount to take advantage of opportunities in the marketplace.
4. Financial Amounts
In order to acquire assets, ...
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