Gurmeet Chadha Homework Chapter 22 22-2 The main two reasons companies hold cash is for transactions and compensating to banks for providing loans and services. To maintain an effective and efficient business operations firms have to have cash balances to cover transactions balances. Firms will encounter unforeseeable circumstances that will make it difficult to estimate its cash in flow and outflow. In order to del with the fluctuations in inflows and outflows firms carry precautionary balances. Another reason for firms to hold cash balances is to make payments for funds received from banks. Many banks require companies to maintain a minimum balance on deposits to cover the costs of providing the service. Banks may also require companies to hold deposits at the bank. Since it is hard to predict the degree of fluctuations in inflow and cash flows for firms it is difficult to estimate the target cash balance to satisfy each reason. Cash inflows and outflows are unpredictable, so in order
This is the end of the preview. Sign up
access the rest of the document.
This note was uploaded on 01/05/2011 for the course FIN 515 taught by Professor Unknown during the Spring '10 term at Keller Graduate School of Management.