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Fundamentals of Corporate Finance

Stephen A. Ross; Randolph W. Westerfield; Bradford D. Jordan

Chapter 19

CASH AND LIQUIDITY MANAGEMENT - all with Video Answers

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Chapter Questions

Problem 1

Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?

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Problem 2

What options are available to a firm if it believes it has too much cash? How about too little?

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03:26

Problem 3

Are stockholders and creditors likely to agree on how much cash a firm should keep on hand?

Daniel Cisneros
Daniel Cisneros
Numerade Educator

Problem 4

In the chapter opening, we discussed the enormous cash positions of several companies. Why would firms such as these hold such large quantities of cash?

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05:30

Problem 5

What is the difference between cash management and liquidity management?

Anas Venkitta
Anas Venkitta
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Problem 6

Why is preferred stock with a dividend tied to short-term interest rates an attractive short-term investment for corporations with excess cash?

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Problem 7

Which would a firm prefer: a net collection float or a net disbursement float? Why?

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02:09

Problem 8

Suppose a firm has a book balance of \$2 million. At the automatic teller machine (ATM), the cash manager finds out that the bank balance is $\$ 2.5$ million. What is the situation here? If this is an ongoing situation, what ethical dilemma arises?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
01:47

Problem 9

For each of the short-term marketable securities given here, provide an example of the potential disadvantages the investment has for meeting a corporation's cash management goals:
a. U.S. Treasury bills.
b. Ordinary preferred stock.
c. Negotiable certificates of deposit (NCDs).
d. Commercial paper.
e. Revenue anticipation notes.
f. Repurchase agreements.

Jennifer Stoner
Jennifer Stoner
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Problem 10

It is sometimes argued that excess cash held by a firm can aggravate agency problems (discussed in Chapter 1) and, more generally, reduce incentives for shareholder wealth maximization. How would you frame the issue here?

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Problem 11

One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?

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Problem 12

Another option usually available is to reduce the firm's outstanding debt. What are the advantages and disadvantages of this use of excess cash?

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02:34

Problem 13

An unfortunately common practice goes like this (warning: don't try this at home): Suppose you are out of money in your checking account; however, your local grocery store will, as a convenience to you as a customer, cash a check for you. So, you cash a check for $\$ 200$. Of course, this check will bounce unless you do something. To prevent this, you go to the grocery the next day and cash another check for $\$ 200$. You take this $\$ 200$ and deposit it. You repeat this process every day, and, in doing so, you make sure that no checks bounce. Eventually, manna from heaven arrives (perhaps in the form of money from home), and you are able to cover your outstanding checks.

Alexander Cheng
Alexander Cheng
Numerade Educator