GT Motors regularly issues short-term debt to finance its daily operations. However, the credit markets suddenly tightened and GT is unable to sell debt at this time. Fortunately, they have some cash reserves that they can use to fund operations until additional credit becomes available. The need to retain cash for situations such as this represents which one of the following motives for holding cash?

Question

Quizplus · Accepted Answer

The need to retain cash for emergency situations such as the inability to sell short-term debt represents the precautionary motive for holding cash. The other motives include speculative, which involves holding cash to take advantage of investment opportunities; transaction, which involves holding cash to facilitate day-to-day business operations; compensating, which involves holding cash to compensate for fluctuations in cash inflows and outflows; and float, which involves holding cash to take advantage of the delay between the time a check is written and the time it clears the bank. However, none of these other motives are relevant in this scenario.

GT Motors Regularly Issues Short-Term Debt to Finance Its Daily