A firm with unpredictable cash flows is trying to set upper and lower limits for cash balances.Which of the following factors will result in upper and lower limits being closer to each other?
A) Variance of the cash flows is low.
B) Cost of trading securities is high.
C) Interest rate is low.
D) Current cash balance is low.

Question

Quizplus · Accepted Answer

If the variance of cash flows is low, it means the cash flows are more predictable. This predictability will result in upper and lower limits being closer to each other, as there wouldn't be really big fluctuations in cash balances that require large buffers to manage.

A Firm with Unpredictable Cash Flows Is Trying to Set