A firm keeps a precautionary cash balance to cover unexpected transactions during the budget period.The size of this balance depends on how safe the firm desires to be in its ability to meet unexpected transactions.

Question

Quizplus · Accepted Answer

All the statements are correct. A larger precautionary cash balance increases a firm's ability to meet unexpected expenses (A), reduces the risk of financial embarrassment and loss of credit standing (B), and also results in a greater potential opportunity cost because the funds are not being invested elsewhere (C).

A Firm Keeps a Precautionary Cash Balance to Cover Unexpected