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Target Cash Balance and Credit Policy

A) What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two?

B) Why would a lock box plan make more sense for a firm that makes sales over the United States than for a firm with the same volume of business but concentrated in its home city?

C) What are the four elements of a firm's credit policy? To what extent can firms set their own credit policies as opposed to having to accept policies that are dictated by "the competition"?

D) 1- What is the days sales outstanding (DSO) for a firm whose sales are $2,920,000 per year and whose accounts receivable are $312,000? 2- Is it true that if this firm sells 3/10, net 40, its customers probably all pay on time? 3- Is it true that if a firm calculates its days sales outstanding, it has no need for an aging schedule?

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What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two?
Ans: Two principal reasons for holding cash are: 1) for transactional purposes, and 2) to maintain a minimum account balance. No, a firm cannot estimate its target cash balance by summing the cash held because the money can satisfy both the transactions and minimum account balance.

Why would a lock box plan make more sense for a firm that makes sales over the ...

Solution Summary

Solution includes principle reasons for holding cash, use of a lock box, elements of a firm's credit policy, and days sales outstanding to name a few.

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