Chapter 27, Problem 1CQ

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

Summary Introduction

To identify: The possibility for a firm to keep too much cash and its impact on shareholders as a firm accumulates too much cash.

Cash Management:

Cash management refers to managing of cash related activities in the operation of the business as it deals with  how much cash should be kept in business and how much to be invested in assets.

Answer to Problem 1CQ

• Yes, the company can store as much amount of cash as they would like to keep.
• The shareholders would be worried if the firm that they have invested in has a huge accumulation of funds in cash.

Explanation of Solution

• The company can store a large amount of cash to meet the requirements of the business in the near future.
• The shareholder would be worried as the company should not keep a large amount of funds in cash idle, the company should invest such cash in marketable securities or in other assets to get more return that will be beneficial for the shareholders at last.

Conclusion

The company should not keep a large amount of cash idle and should invest in other assets to get higher returns.