The minimum required cash balance for a firm is $12,000. This firm estimates that its cash inflows for next month will total about $25,000 and that its cash outflows will total about $16,000. If the firm's beginning cash balance is $0, will this firm need to take out a short-term loan for next month? If so, how much will it need to borrow?
Yes, the firm will need to borrow $3,000.
To determine if the firm needs to borrow, we analyze its cash position. With an estimated cash inflow of $25,000 and cash outflow of $16,000, the firm will have a net cash balance of $9,000. However, since the minimum required cash balance is $12,000, the firm will fall short by $3,000 and will need to take out a short-term loan.
This option is correct because after calculating the net cash position, the firm will have $9,000 available. Given that it requires a minimum of $12,000, the shortfall is indeed $3,000, necessitating a loan to cover this deficit.
This choice is incorrect as the firm does not meet the minimum cash balance. With a net cash balance of $9,000, it falls short of the $12,000 requirement, which clearly indicates the need for borrowing.
This option is incorrect because the firm only needs to borrow $3,000 to meet the minimum cash balance. The calculation of cash inflows and outflows shows a net cash balance of $9,000, not a requirement for a $9,000 loan.
While it is true that cash inflows exceed outflows, this does not directly address the issue of the minimum required cash balance. The firm still has a deficit relative to the required amount, making this option misleading.
In summary, the firm will need to borrow $3,000 to meet its minimum cash requirement of $12,000. Despite having higher cash inflows than outflows, the resulting cash balance of $9,000 is insufficient, highlighting the need for a short-term loan to address the cash shortfall.
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