Proper working capital management requires a manager to focus on a firms working capital, with a particular emphasis on maintaining an optimal level of cash and marketable securities. Cash and marketable securities, also called near-cash equivalents, are the most liquid of the firms assets. A firms ability to maintain sufficient cash to pay its bills when they become due is critical. However, when the firms cash on hand and immediately expected cash inflows are insufficient to meet these obligations, having a portfolio of immediately-saleable marketable securities reduces the firms potential for default.

Read the following statements regarding the firms cash and marketable securities investments and determine which are true:

Statement I: Proper cash management requires the firm to slow its cash collections and speed its cash disbursements.

Statement II: Cash and marketable security balances provide the firm with a cushion against economic downturns, technological and production difficulties, and unexpected delays.

Statement III: Proper cash management requires the firm to speed its cash collections and slow its cash disbursements.

Statement IV: Low cash balances can make a firm a potential takeover target.

Which of the previous statements are true?

I, II, III, and IV

I only

IV only

II and III

As with the firms other assets, a risk-return trade-off is associated with holding cash balances. Which of the following statements regarding this trade-off are true, assuming all other things are equal? Check all that apply.

Among the costs associated with holding less than the optimal level of cash is a risk of default on the firms normal operational payments (for example, payments for materials and equipment, wages, and utilities) and contractual obligations (for example, interest, lease, and sinking fund payments and pension fund contributions).

Among the benefits associated with holding less than the optimal level of cash and correspondingly larger investments in marketable securities is an increase in the investment income earned.