Question

Whatarethreereasonswhycompaniespurchaseinvestmentsindebtorstocksecurities? 2. Why would a corporation have excess cash that it does not need for operations?

3. What is the typical investment when investing cash for short periods of time?

4. What are the typical investments when investing cash to generate earnings?

5. Why would a company invest in securities that provide no current cash flows? 6. What is the typical stock investment when investing cash for strategic reasons?

Answer 1

1. The reasons why companies purchase investments in debt or stock securities are:

1. Company wants to go in for diversification.
2. Company aims to go in for some strategic participation,
3. Company has an intention to boost its revenue

2. a)A corporation should have excess cash that it doesn’t need for its operations because of the seasonal fluctuations that happen in the sales of the organization and that excess serves as a cushioning to tide over the problems.

b)A corporation should have excess cash that it doesn’t need for its operations because of the      economic cycles that have taken place.

               c)A corporation should have excess cash that it doesn’t need for its operations because it might

                   need that cash for the next acquisition that it intends.

3. The typical investments made when investing cash for short periods of time are as follows:

1. Treasury Bills
2. Money Market Funds
3. Certificates of Deposit

4. The typical investments made when investing cash for generating earnings are as follows:

1. Equity shares or Common Stock
2. Bonds
3. Index Funds

5. The company should invest in securities that provide no current cash flow for the following reasons:

1. For the purpose of deferring or delaying the cash flows
2. For tax purposes