The level of cash a firm holds is irrelevant; a firm is able to raise new money instantly at a fair rate, so it can never be short of cash. Similarly, the firm can invest excess cash at a fair rate to earn an NPV of zero.

Question

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The level of cash a firm holds is not irrelevant. Holding excess cash can lead to opportunity costs and holding too little cash can result in liquidity issues. While a firm may be able to raise money quickly, the cost of doing so may not always be fair. Similarly, investing excess cash at a fair rate to earn an NPV of zero may not be the best use of resources for the firm.

The Level of Cash a Firm Holds Is Irrelevant; a Firm