Which of the following statements is correct?

Question

Quizplus · Accepted Answer

The cost of borrowing affects the target cash balance because a higher cost of borrowing would increase the target cash balance. With higher borrowing costs, the firm needs to maintain a higher balance in order to avoid frequent borrowing at a high cost. None of the other statements are correct - A is false because unexpected loans are more likely when cash flows are volatile, C is false because a low cash balance leads to more borrowing needs, D is false because a higher interest rate would increase the borrowing cost and thus increase the target cash balance, and E is false because the target cash balance would increase with higher order costs to avoid frequent ordering.

Which of the Following Statements Is Correct