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Which of the following is not true about the need of the firm to maintain cash balances? Select one: a
Which of the following is not true about the need of the firm to maintain cash balances?
Select one:
a. The firm will need to hold cash sufficient to cover its routine transactions for operations.
b. Maintaining cash balances allows the firm to take advantages of potential trade discounts on raw material orders.
c. Lines of credit and marketable securities provide a degree of insulation for maintaining cash balances, but do not allow the firm to ignore the need for cash for potentially precautionary transactions.
d. Banks require the firm to maintain compensating balances and will not allow the firm to mitigate the need for compensating balances through fee payments.
e. None of the above is a valid reason for the firm to maintain cash balances.
Expert Solution
Option B.
Because the main objectives of maintaining cash balance is to make payments according to the payment schedule and to minimize it's cash balances as unused cash balances reduces profitability of the company.
And effective cash management is considered to be important as cash management helps to allow the firm to take advantage of discount, special purchases and business opportunities.
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