Question

Explain how each of the following factors would probably affect a firm’s target cash balance if...

  1. Explain how each of the following factors would probably affect a firm’s target cash balance if all other factors were held constant. (3 pts)

  1. The firm institutes a new billing procedure that better synchronizes its cash inflows and outflows.

  1. The firm develops a new sales forecasting technique that improves its forecasts.

  1. The firm reduces its portfolio of U.S. Treasury bills.

  1. The firm arranges to use an overdraft system for its checking account.

  1. The firm borrows a large amount of money from its bank and also begins to write far more checks than it did in the past.

  1. Interest rates on Treasury bills rise from 5% to 10%.

Homework Answers

Answer #1

1. Having a faster billing procedure will allow the firm to lower target cash balance since the transactions balance can be at minimum.

2. Improved sales forecast will lower target cash balance as the cash collections go up.

3. A reduction in the portfolio of US treasury bills will increasee the target cash balance due to sale of securities.

4. An overdraft system will allow the firm to hold less cash and therefore the target cash balance will decrease.

5. Borrowing money from the bank will reduce the target cash balance but will be offset by the more checks written by the firm.

6. Interest rates on Treasury bills rise from 5% to 10% will increase the target cash balance to meet investment requirements.

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