Most Large Firms Hold a Larger Cash Balance Than Most

question 60

Multiple Choice

Most large firms hold a larger cash balance than most models imply because:

• A)it is too difficult to estimate the costs of security transactions.
• B)banks are compensated by account balances for payment of services.
• C)corporations have few bank accounts and it is difficult to manage their cash.
• D)cash is costless and need not be managed closely.
• E)the costs of holding cash for these firms is negligible.

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Definitions:

Economic Climate

The overall state of the economic environment, factoring in aspects like growth rates, employment levels, inflation, and consumer spending.

Financial Leverage

Financial leverage refers to the use of debt (borrowed funds) to amplify the potential returns to shareholders. It increases the potential for both gains and losses.

Operating Risk

The risk arising from the day-to-day operations of a company, indicating the variability in operating income due to changes in revenue and expenses.

Financial Risk

The potential for losses due to factors affecting the overall financial market or specific securities within a portfolio.