Assume a firm can either hold cash paying no interest or invest in marketable securities.Which one of the following might induce the manager to hold higher cash balances today?
A) The cost of borrowing is high relative to interest rates on marketable securities.
B) Future cash flows are relatively predictable.
C) The cost of cash balances is relatively high.
D) Bank interest rates are expected to decrease.

Question

Quizplus · Accepted Answer

If the cost of borrowing is high relative to the interest rates on marketable securities, the firm might prefer to hold higher cash balances to avoid expensive borrowing costs in the future.

Assume a Firm Can Either Hold Cash Paying No Interest