Asked by Hloni Nkolanyane on Jul 14, 2024
Verified
Which of the following statements is correct?
A) In the Miller-Orr model the greater the interest rate, the greater the target cash balance.
B) In the BAT model the greater the order cost, the higher the target cash balance.
C) If a firm chooses to borrow, rather than invest in marketable securities, it will find that borrowing is likely to be less expensive than selling marketable securities.
D) A firm is less likely to have to borrow to cover an unexpected cash outflow the greater its cash flow variability.
E) A firm is less likely to have to borrow to cover an unexpected cash outflow the lower its investment in marketable securities.
Miller-Orr Model
A mathematical model used in finance to manage cash flow and determine the optimal level of cash balances for a firm.
BAT Model
A theoretical framework that outlines the potential consequences of Brexit across different sectors and regions.
Target Cash Balance
An optimal amount of cash that a company aims to hold to satisfy its operational and transactional requirements while minimizing holding costs.
- Obtain comprehension about the Miller-Orr and BAT models for superior cash management strategies.
- Acknowledge the financial costs incurred from either minimal or excessive cash holdings, and the importance of money market devices in the regulation of liquidity.
Verified Answer
CH
Cassie HerranJul 16, 2024
Final Answer :
B
Explanation :
The BAT model (Baumol-Tobin model) suggests that the target cash balance increases with higher transaction costs (order costs), as it becomes more expensive to convert securities to cash frequently. This model treats cash management similar to inventory management, where higher costs per order lead to larger optimal order sizes (or cash balances, in this context) to minimize total costs.
Learning Objectives
- Obtain comprehension about the Miller-Orr and BAT models for superior cash management strategies.
- Acknowledge the financial costs incurred from either minimal or excessive cash holdings, and the importance of money market devices in the regulation of liquidity.