Question

Planting Haven has excess cash of $15,000 at the end of the harvesting season. Planting Haven...

Planting Haven has excess cash of $15,000 at the end of the harvesting season. Planting Haven will need this in four months for normal operation requirements.

1. What are some reasons why Planting Haven may choose to invest in debt or equity securities?

2. What type of classification would Planting Haven's investment fall within----Short-term or long-term? why?

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Answer #1

1. Planting Haven would prefer to invest in debt securities, as the return therefrom is fixed, and default risk is minimum, Therefore, there would be no risk of capital erosion. Investment in equity securities on the other hand, could have given much higher return, but the risk also would have been high. There would be a possibility that, at the end of the 4 month investment horizon, the firm would not get all its money back, and its operations are going to be hampered.

2. Since the investment period is only 4 months, it is less than the operating cycle of the business. Therefore, it is a short term investment.

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