Other things held constant,if a firm holds cash balances in excess of their optimal level in a non-interest bearing account,this will tend to lower the firm's
A) Operating profit margin.
B) Total asset turnover.
C) Return on equity.
D) All of the above.
E) Answers b and c above.

Question

Quizplus · Accepted Answer

Holding excess cash balances in a non-interest bearing account means that the firm is not earning any return on those funds. As a result, the firm's total asset turnover (B) and return on equity (C) will both decrease, which will ultimately lower the firm's profitability and operating profit margin (D). Therefore, the correct answer is E - holding excess cash balances in a non-interest bearing account will lower the firm's total asset turnover and return on equity.

Other Things Held Constant,if a Firm Holds Cash Balances in Excess