Explain how each of the following factors would probably affect a firm

QUESTION

Explain how each of the following factors would probably affect a firms target cash balance if all other factors were held constant:a. The firm institutes a new billing procedure that better aynchronizes its cash inflows and outflows.b. The firm develops a new sales forecasting technique that improves its forecasts.c. The firm reduces its portfolio of U.S. Treasury bills.d. The firm arranges to use an overdraft system for its checking account.e. The firm borrows a large amount of money from its bank and also begins to write far more checks than it did in the past.f. Interest rates on Treasury bills rise from 5% to 10%.
a. Better synchronization of cash inflows and outflows would allow the firm to keep its transactions balance at a minimum, and would therefore lower the target cash balance. b. Improved sales forecasts would tend to lower the target cash balance. c. A reduction in the portfolio of U.S. Treasury bills (marketable securities) would cause the firms cash balance to rise if the Treasury bills had been held in lieu of cash balances. d. An overdraft system will enable the firm to hold less cash. e¦.

f the amount borrowed equals the increase in check-writing, the target cash balance will not change. Otherwise, the target cash balance may rise or fall, depending on the relationship between the amount borrowed and the number of checks written. f. The firm will tend to hold more Treasury bills, and the target cash balance will tend to decline.

ANSWER:

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