Financial Healthcare

Question by Professor:

Businesses hold marketable securities (cash equivalents and short-term investments) for two primary reasons: As an interest-earning substitute for cash. As a temporary repository for cash being accumulated to meet a specific near-term need. In reality, cash management and marketable securities management are accomplished simultaneously. What are some of the advantages and disadvantages of holding marketable security both for long-term and shorten reasons?

You post must at least 1 paragraph each with a minimum of 2 peer-reviewed references in APA Format. No Wikipedia, BLOGS with ads from yahoo.com or google.com, as they present biased opinion. Use peer-reviewed articles to support your thoughts!

Student 1: Alejandro De La Portilla Mechoso

Advantages and disadvantages of holding marketable security both for long-term and shorten reasons.

Different companies or governments have different reasons for holding marketable securities. Some firms or governments keep them since they need substitute cash. Others hold marketable securities in place of large cash balances with the hope of liquidating part of the portfolio to increase cash when cash shortages arise. Moreover, other companies or governments hold marketable securities due to the need for temporary investment especially with firms engaged in cyclical operations and encounters surplus cash flows in one period and deficit in another period (Badoer & James, 2016). Thus, companies hold marketable securities as financial stocks for transaction, speculative ad precautionary purposes.

Advantages

One of the advantages of holding marketable securities especially in long term is that it offers a safety margin in the availability of funds despite its higher cost-reducing the profit potential of a company.

Holding securities for short-term financing assures company liquidity of the firm reducing the uncertainty of being insolvent despite distracting a company from profit abilities.

Holding marketable securities either short-term or long-term is essential to a company as it is a central concept to a firm’s potential to meet its long-term or short-term debts and other financial obligations.

Lastly, holding marketable securities assists companies to bargain purchases thereby providing growth opportunities (Chireka & Bamidele Fakoya, 2017).

Disadvantages

Holding marketable securities in excess is highly risky as it is subject to misuse by management and in addition, there is a possibility of conflict of interest arising between the owners and the management. Also, holding less marketable securities may lead companies to financial distress thereby bankruptcy as a result of the inability to meeting its prevailing obligation (Kuldeep & Misra, 2019). Thus, the need of companies and governments keeping that amount of the cash needed for daily use while the rest are invested to earn interest.

Holding excess marketable securities tends to establish a free cash flow issue with companies due to managers may invest in the free cash flow into low returns projects or wasting it on other organizational inefficiencies.

References

BADOER, D., & JAMES, C. (2016). The determinants of long-term corporate debt issuances. The Journal of Finance, 71(1), 457–492. https://doi.org/10.1111/jofi.12264

Chireka, T., & Bamidele Fakoya, M. (2017). The determinants of corporate cash holdings levels: Evidence from selected South African retail firms. Investment Management and Financial Innovations, 14(2), 79–93. https://doi.org/10.21511/imfi.14(2).2017.08

Kuldeep, S., & Misra, M. (2019). Financial determinants of cash holding levels: An analysis of Indian agricultural enterprises

Student 2: Annabis Albino

Many companies short term securities on their balance sheet. The company’s short-term securities with three-month maturities or less are lumped in with cash and are often labeled cash ad cash equivalents. Maturity short-term securities between three months to one year are short-term investments that are reported separately. Marketable securities serve as an interest-earning substitute for cash balances. Marketable securities also hold funds that are being accumulated to meet specific significant near-term obligations, whether tax payments or capital expenditure (Gapenski & Reiter, 2021).

When it comes to borrowing money, companies, municipalities, and governments issue debt securities, the issuer pays the loan interest. It pays the initial loan amount in full at a specified future date. The companies that issue the debt do not dilute company ownership, and the management maintains control over the corporate operations. The company is aware of its liability which can be the principal amount borrowed plus interest payments. The amount can vary if the bond is a viable interest bond. The company can deduct the interest in their company taxes. Debt is temporary, and the obligation is in full when the bond matures (Baer, 2011).

Marketing securities also have their disadvantages. Loans must be prepaid, or the bondholder will take legal steps, including forcing the company to go into bankruptcy. The company’s that are having economic difficulties may have problems meeting their interest payments. Interest expenses can be financially hard on corporate operations and profits. The amount a company can borrow is limited to the amount of interest it can handle. Some loans require a company to pledge collateral or company assets. Investors and analysts examine a company’s debt to ratio. If the ratio is too high, the investors may consider the company too risky and not invest in the business (Baer, 2011).

References:

Baer, M. (2011). Advantages & Disadvantages of Marketable Securities | Sapling.com. Sapling.com. https://www.sapling.com/8553383/advantages-disadvantages-marketable-securities

Gapenski, L. C., & Reiter, K. L. (2021). Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management. Health Administration Press; Washington, Dc.