Question

1. Offer three reasons with full explanation for why it is important for companies to keep a fair portion of their overall asset balance in liquid assets. 2. What are some considerations for companies in choosing which marketable securities to invest idle cash balances?

Answer 1

Answer:

1)

i)

Any firm needs money and other liquid assets for cover its bills as obligations or debt come due. Liquidity really alludes to two measurements: the simplicity with which the firm can change over an asset to cash, and how much such a conversion happens at an honest market value. You can change over any asset for money quickly on the off chance that you value the asset sufficiently low. In any case, obviously, you will wish to convert over the asset without giving up an incredible part of its worth. So an exceptionally liquid asset can be sold rapidly at its honest market value . An illiquid asset, on the other hand, can't be sold rapidly except if you lessen the cost far below reasonable worth.

ii)

Current assets, by definition, remain generally liquid, including money and assets that will change over to money inside the following year. Stock is minimal liquid of the present assets. Fixed assets, at that point, remain generally illiquid. In the normal course of business, the firm would have no designs to condense or change over these tangible assets, for example, buildings and equipment into money.

iii)

Liquidity displays a twofold edged sword on an balance sheet. The more liquid assets a firm holds, the less likely the firm will be to experience fiscal misery. Be that as it may, liquid assets produce no profits for a firm. For instance, money is the most liquid all things considered, yet it acquires no return for the firm. Conversely, fixed assets are illiquid, however give the way to produce income. Along these lines, managers must consider the trade-off between the advantages of liquidity on the balance sheet and the disadvantages of having cash sit idle instead of producing profits.

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2)

Marketable securities are the securities that can be effortlessly liquidated without any delay at a sensible price.Firms will keep up levels of marketable securities to ensure that they can rapidly renew cash balances and to acquire more significant or higher returns than is conceivable by maintaining cash.There are four factors that impact the decision of marketable securities. These incorporate risk, maturity, yield, and liquidity.

Marketable securities are securities that can be handily liquidated immediately at a sensible cost. It is the part of an organization's short term investment. Firms will keep up levels of marketable securities to ensure that they can rapidly recharge money balances and to acquire better yields than is conceivable by maintaining money.

The fundamental reason behind holding marketable securities is that they fill in as a substitute for money balances. Numerous organizations want to hold marketable securities as a substitute for transaction balances, precautionary adjusts, or for speculative balances of for every one of the three. As a rule the securities are held fundamentally for precautionary purposes or as a guard from against a potential lack of bank credit.