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    Two reasons for holding cash; estimate target cash balance

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    What are the two principal reasons for holding cash? Can a firm estimate its target cash balance held to satisify each of the two reasons?

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    Solution Preview

    The first reason to hold cash is to have sufficient liquidity to meet future obligations. This is also called having 'cash for transactions'. The amount needed is relatively easy to forecast using a flexible budget which takes into account a range of values for future income and expense.

    The second reason to hold cash is to have it function as a reserve. A reserve is much like a savings account for an individual, meaning that it isn't always ...

    Solution Summary

    The solution names two specific reasons for a company to hold cash and then illustrates the concepts with examples in approximately 253 words.

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