Cash should have a higher required return than accounts receivable because it is more liquid. True...

Cash should have a higher required return than accounts receivable because it is more liquid. True or False.

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Expert Solution

The answer is False.

Liquid Assets - Those assets which can be converted into cash easily without affecting the assets price. Example -Cash, Accounts Receivable,Accrued income, Bills receivable etc.

An asset with higher liquidity will have lower required return. An investor would require higher returns on asset which has lower liquidity. As cash is an liquid asset, investors would require lower return.

Same is in the case for Investments as investments with higher liquidity have lower returns because the investors get the option to convert their investments into cash within a short period of time.

Accounts receivable is not as liquid as Cash because it represents goods sold to customers on credit. Since customers enjoy the credit period accounts receivable takes time to convert in cash.

Thus it can be concluded that Cash will not have higher required return than accounts receivable.

Therefore the statement given in the question is False.

ekkarill92 answered 1 year ago

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