Which of the following statements is correct?
A) The cash balances of most firms consist of transactions,compensating,precautionary,and speculative 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) Firms today are more likely to rely on cash than on reserve borrowing power or marketable securities for speculative purposes because of the need to move quickly.
E) Each of the above statements is false.

Question

Quizplus · Accepted Answer

Holding highly liquid marketable securities can accomplish the same objective as holding cash for some firms. The other statements are false. A is incorrect because most firms do not have all four types of cash balances and the total desired cash balance cannot simply be determined by adding them together. B is incorrect because higher access to borrowed funds would actually decrease precautionary balances. D is incorrect because firms today are more likely to rely on reserve borrowing power or marketable securities for speculative purposes due to their flexibility and lower transaction costs compared to holding cash.

Which of the Following Statements Is Correct