Chapter 22 - Chapter 22 Question 22-2 What are the two...

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Chapter 22 Question 22-2 What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons? The two reasons for holding cash are: 1. Transactions. Cash balances are necessary in business operations. Payments must be made in cash, and receipts are deposited in the cash account. Cash balances associated with routine payments and collections are known as transactions balances. Cash inflows and outflows are unpredictable, with the degree of predictability varying among firms and industries. Therefore, firms need to hold some cash in reserve for random, unforeseen fluctuations in inflows and outflows. These “safety stocks” are called precautionary balances, and the less predictable the firm’s cash flows, the larger such balances should be. 2. Compensation to banks for providing loans and services. A bank makes money by lending out funds that have been deposited with it, so the larger its deposits, the
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This note was uploaded on 12/14/2010 for the course IS 535 taught by Professor Nash during the Fall '08 term at Keller Graduate School of Management.

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Chapter 22 - Chapter 22 Question 22-2 What are the two...

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