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Opportunity Cost of Cash Balances and Excessive Liquidity

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1. What's the opportunity cost of cash balances to a firm?
2. What is the danger of excessive liquidity?
3. What are the costs and benefits of stringent credit collection policies?
4. How is inventory turnover impacted by just-in-time?
5. Why, traditionally, was it recommended to take cash discounts on purchases?
6. What is meant by aging of accounts receivables, and how can it be usefully applied?
7. What is the biggest obstacle in forecasting a firm's future financial performance and how can financial statements help?

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Answer:
1. Opportunity cost of cash balance to the firm is referred to the return the firm can earn if the same cash is invested in the market place securities. So the opportunity cost of holding cash balance will be equal to the market rate of return. The minimum opportunity cost of holding cash equals to the return from treasury bills.
2. Excessive liquidity may lead to bankruptcy. If a firm has excess liquidity and due unexpected unfavorable market condition cash inflow drops down, it becomes difficult for the firm to repay the ...

Solution Summary

The solution examines opportunity cost of cash balances and excessive liquidity for stringent credit collection.

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