Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

  • Cash-oriented versus credit-oriented businesses.
    Firmsthatareincash-orientedbusinesses(fast-food
    restaurants,grocerystores)willrequiremorecashfor
    operationsthanfirmsthatoperate incredit-oriented
    businesses.

  • Smallversuslargetransactions.Firmsthatgenerate
    theirrevenuesinmultitudesofsmalltransactionsare
    morelikelytorequirecashfortheirbusinessesthan
    firms that generate revenues in a few large
    transactions. It isunlikely that a firmlike Boeing,
    which receives its revenues on a few large
    transactions,willreceiveorpaycashonmostofits
    transactions.Asarelatedpoint,thereshouldbesome
    economiesofscalethatallowlargerfirmstomaintain
    lower (proportional) operating cash balances than
    smaller firms.
    4

  • Bankingsystem.Asbankingsystemsevolve,fewer
    and fewer transactions will be cash based. As a
    consequence,wewouldexpectcashrequirementsto
    decreaseasbankingsystemsgetmoresophisticated,
    allowing customers to pay with credit cards or
    checks.


Whilewecandebatehowmuchoperatingcashisneededina
firm,therecanbelittleargumentthatbankingtechnologyand
investment opportunities have improved for most firms in
most economies, leading to lower operating cash
requirements across the board.


Precautionary Motives

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