Other things held constant, if a firm holds cash balances in excess of their optimal level in a non-interest bearing account, this will tend to lower the firm's
A)Profit margin.
B)Total asset turnover.
C)Return on equity.
D)All of the above.
E)Answers b and c above.

Question

Quizplus · Accepted Answer

Holding excess cash balances in a non-interest bearing account means the firm is not earning any return on that cash. This will lower the firm's total asset turnover as the cash is essentially a non-productive asset. Additionally, the cash is not being used to generate profits, so the firm's return on equity will also be lower.

Other Things Held Constant, If a Firm Holds Cash Balances