26. 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?
Answer: A
Yes, the firm will need to borrow $3,000.
To maintain the minimum required cash balance of $12,000, the firm will need to borrow $3,000, considering its cash inflows and outflows for the month.
A) Yes, the firm will need to borrow $3,000.
This option is correct because the firm anticipates cash inflows of $25,000 and cash outflows of $16,000, resulting in a net cash flow of $9,000 for the month. Starting with a beginning cash balance of $0, the total cash available at the end of the month will be $9,000. Since this amount is still below the required cash balance of $12,000, the firm will need to borrow $3,000 to meet this minimum requirement.
B) No, the firm will not need a loan because it met the minimum required cash balance.
This option is incorrect because the firm will not have enough cash to meet the minimum required balance. With a total cash available of $9,000 at the end of the month, the firm falls short of the $12,000 requirement, necessitating a loan.
C) Yes, the firm will need to borrow $9,000.
This option is incorrect as the calculation of cash available shows the firm will only need to borrow $3,000, not $9,000. The firm’s net cash flow of $9,000 does not cover the minimum cash balance, but borrowing $9,000 would exceed what is necessary to meet that requirement.
D) No, the firm will not need a loan because cash inflows were greater than cash outflows.
This option is misleading. While it is true that cash inflows exceed cash outflows, the net cash flow of $9,000 is still insufficient to reach the minimum required cash balance of $12,000. Therefore, the firm will still need to borrow money.
Conclusion
In conclusion, the firm will need to borrow $3,000 to meet its minimum cash balance requirement of $12,000. All other options fail to recognize that, despite positive cash inflows, the firm does not have enough net cash available to satisfy its minimum cash needs. Thus, Option A accurately reflects the firm's financial situation for the upcoming month.