Which of the following statements is correct?

Question

Quizplus · Accepted Answer

The cost of borrowing, such as interest rates and fees, impacts the target cash balance of a firm. If borrowing costs are high, the firm may need to maintain a higher cash balance to avoid frequent borrowing, whereas lower borrowing costs may allow for a lower target cash balance. Choice A is incorrect because firms with more variable cash flows are more likely to need unexpected loans. Choice C is incorrect because a firm's desire for a low cash balance may increase its borrowing needs to cover unexpected expenses. Choice D is incorrect because the target cash balance typically decreases as interest rates increase, as higher interest rates incentivize holding less cash and investing in higher yielding assets. Choice E is also incorrect because higher order costs typically result in a higher target cash balance to reduce the frequency of ordering and associated costs.

Which of the Following Statements Is Correct