cashandtheextentofsuchholdingsatcompanies.Wethen
discussvariousapproachesusedtocategorizecashholdings
andhowbesttodealwithcashholdingsinbothdiscounted
cash flow and relative valuations.
Why Do Companies Hold Cash?
Everybusinesshassomecashonitsbooks,andmanyhave
very largecashbalances asa percentof theirvalues.John
Maynard Keynesprovided threemotives forindividuals to
hold money. He suggested that they hold cash for
transactions,asaprecautionagainstunanticipatedexpenses,
and for speculative purposes.
1 Itcanbe arguedthatfirmsaccumulatecash forthesame
reasons,but thereis anaddedincentive. Theseparation of
management and stockholders at large publicly traded
companiescancreatean incentiveforfirms (oratleastthe
managers in these firms) to accumulate cash.
2
Operating (Transactions)
MotiveFirms need cash foroperations, and the needs are
likely tobe differentfor differentbusinesses.Forinstance,
retailfirmshavetohavecashavailableinthecashregistersof
thestoresto runtheir businesses.Furthermore,thesefirms
needaccesstocashtoreplacedepletedinventoryandtomeet
their weekly payrolls.
3 Incontrast,acomputersoftwarecompanymaybeableto
getaway witha muchsmaller operatingcash balance.We
wouldexpectcashneedsforoperationstobeafunctionofthe
following variables: