ACCA FM · Chapter 5 · Question 10 of 10
A company has a temporary cash surplus that will be needed to pay a tax liability in three months' time. Which of the following is the MOST appropriate investment?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) A three-month bank deposit or certificate of deposit
Explanation
Surplus cash needed in the short term should be invested in low-risk, liquid instruments whose maturity matches the date the cash is needed. Shares and long-dated bonds expose the company to price risk (the value could fall before the tax is due), and an unsecured loan to a customer is risky and illiquid.
More Cash management and working capital funding MCQs
- Q2A company uses the Miller-Orr model. The minimum cash balance is $20,000, the cost of each transaction in securities is $50, the standard…
- Q3Using the Miller-Orr model, a company has set a lower cash limit of $10,000 and calculated a spread of $36,000. What is the return point?
- Q4Under the Miller-Orr cash management model, what action should a company take when its cash balance reaches the upper limit?
- Q5Which of the following is the main purpose of preparing a cash budget?
- Q6Which of the following describes an aggressive working capital funding policy?