What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?

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What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?

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What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?

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The two principles for holding cash are:-

Transaction balances - It is the amount required to conduct day-to-day activities.
Compensating balances - It is the minimum balance that a bank needs as compensation for the services rendered.

The cash held to settle each of the two reasons often can partially satisfy both motives, therefore the target cash balance cannot be equal to the sum of holdings for each reason.

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