Reference no: EM13870727
Please respond to this post with whether you agree or disagree with their post, why you take that stance and at least one APA cited reference that supports your view.
A company can hold too much cash and for the following reasons, shareholders can show just concern:
When a firm holds cash in excess of some necessary minimum, it incurs an opportunity cost. The opportunity cost of excess cash (held in currency or bank deposits) is the interest income that could be earned by the next best use, such as investment in marketable securities (Taken from Ross & Westerfield, p. 835).
A company needs to balance the benefits of holding cash to meet transactions and avoid insolvency against the opportunity costs of lower returns. A sensible cash management policy is to have enough cash on hand to meet the obligations that may arise in the ordinary course of business and to invest some excess cash in marketable securities for precautionary purposes. All other excess cash should be invested in the business or paid out to investors (Taken from Ross & Westerfield, p. 836).
If the firm maintains too small a cash balance, it may run out of cash. If this happens, the firm may have to raise cash on a short-term basis. This could involve, for example, selling marketable securities or borrowing, activities that involve various costs. (Taken from Ross & Westerfield, p. 835).
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