To explain: The reason that safety and liquidity are more important concerns than maximizing profit while managing the cash and marketable securities.
Introduction:
Cash management:
Management of the cash flows of a firm is known as cash management. It includes the management of cash expenses and cash receipts. In other words, it refers to the control over the payment of expenses or liabilities and collection of revenue.
Management of marketable securities:
The selection of one among several short-term investments is known as the management of marketable securities. It affects the liquidity of the firm and provides return in the form of interest. Thus, marketable securities should be managed properly.
Answer to Problem 1DQ
Safety and liquidity more important concerns in the management of cash and marketable securities because cash and marketable securities are used to meet the day-to-day or contingency cash requirements of the business. Thus, profit maximization comes after the safety and liquidity concerns.
Explanation of Solution
The primary concerns while managing cash and marketable securities are safety and liquidity, which means that cash and marketable securities must be used in a way that does not involve considerable risk.
Liquidity is also an important concern while managing cash and marketable securities to meet a contingent requirement of cash. It is required to meet the financial obligations of the business. Thus, profit maximization is a secondary concern.
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Chapter 7 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
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