Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
Question
Book Icon
Chapter 15, Problem 1OR
Summary Introduction

Case summary:

The global treasury news discovered that the number one risk is the liquidity risk in its annual survey. The global financial crisis explained the impact of liquidity risk where there was simply not enough liquid cash for the companies.

The concept of holding large cash reserves are beneficial but they can also bring back low returns on those assets. The firms must decide how much cash they must hold to ensure the safety of a firm.

To explain: The tradeoff companies face when they decide how much cash to hold in reserve.

Introduction:

Liquidity risk:

It is the risk where the firm is facing a possibility of low cash reserves or any access to cash with the help of credit markets when it is required.

Expert Solution & Answer
Check Mark

Explanation of Solution

The tradeoff companies face when they decide how much cash to hold in reserve:

A company with a huge cash reserve is beneficial for the company. It helps to overcome the temporary fluctuations in the market. But, the possession of large cash reserves can also hinder the productivity of the company. The gap between the returns on cash and the price for holding the cash indicated by the cost of capital.

The company is effectively earning less than what the investors are expecting from the cash balance. The company with a large cash balance also cannot find an additional capital investment opportunity and they have no idea about new investment opportunities. This will be sent as a negative signal to the investors leading to reflections in the share price.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 15 Solutions

Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)

Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education