Question

1. Why do stockholders typically dislike when companies hold large amounts of cash?

2. Why do short-term debt holders like companies to hold large amounts of cash?

3. What factors determine how much cash a company should hold?

4. What factors do investors use to evaluate liquidity?

Answer 1

Question: 1.

answer: Stockholders typically dislike when companies hold large amount of cash because company have to pay large amount of Interest expense (if it is also funded by debt ) and it has also faces opportunity loss due to not investing the money outside the business which overall results in lowering the net income and due to which stockholders get lower amount of dividends.

Question 2.

Answer: Short-term debt holders like companies to hold large amount of cash because their risk of not getting payment early becomes lower. If company holds short amount of cash, their risk of not getting payment is increased because company's liquidity also gets reduced.

Question 3.

Answer: Their are various factors which determine the amount of cash holdings for a company like:

• Nature of business of company
• Collection terms of Accounts receivables (if presents)
• Working capital need
• Terms of purchase
• Terms for payments to accounts payable and etc.

Question: 4

Answer: Investors use Current ratio, Quick ratio and present working capital of company to evaluate liquidity.

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