The level of cash a firm holds is irrelevant; it can never be short of cash since a firm is able to raise new money instantly at a fair rate, while it can never have surplus cash since the firm can invest excess cash at a fair rate to earn a net present value (NPV) of zero.

Question

Quizplus · Accepted Answer

While it is true that a firm can raise new money and invest excess cash, the level of cash a firm holds can be relevant in terms of financial planning, cash flow management, and financial risk management. Holding too little cash can lead to liquidity issues and difficulties in meeting short-term obligations, while holding too much cash can lead to missed investment opportunities and lower returns on investment. Therefore, firms need to strike a balance between holding enough cash to meet operational and financial needs and investing excess cash at a reasonable rate of return.

The Level of Cash a Firm Holds Is Irrelevant; It