Which of the following statements is most correct?
A) The cash balances of most firms consist of transactions, compensating, and precautionary balances. The total desired cash balance can be determined by calculating the amount needed for each purpose and then summing them together.
B) The easier a firm's access to borrowed funds, the higher its precautionary balances will be in order to protect against sudden increases in interest rates.
C) For some firms holding highly liquid marketable securities is a substitute for holding cash, because the marketable securities accomplish the same objective as cash.
D) All companies hold the same amount of funds for a transaction balance.
E) None of the statements above is correct.

Question

Quizplus · Accepted Answer

Option A is incorrect as the cash balances of firms can consist of additional balances, such as speculative balances. Option B is incorrect as the precautionary balances are higher when firms have limited access to borrowed funds. Option D is incorrect as every company has a unique transaction balance depending on their business operations. Option C is the most correct statement as highly liquid marketable securities can be used as substitutes for cash, especially for firms needing to hold large amounts of cash.

Which of the Following Statements Is Most Correct