When a firm has excessive cash,managers may make use of the funds in an inefficient manner.This is also referred to as the ________ cost of retaining cash.

Question

Quizplus · Accepted Answer

The agency cost arises when managers use excessive cash in an inefficient manner, such as making unnecessary acquisitions, expanding operations too quickly, or pursuing projects with low returns. This can lead to a reduction in shareholder value and increases the cost of capital. Therefore, holding excessive cash can result in agency costs for the firm. The other options, such as fixed cost, interest cost, special cost, or hidden cost, are not directly related to the inefficiency of holding excessive cash.

When a Firm Has Excessive Cash,managers May Make Use of the Funds