Which of the following is incorrect regarding the costs and benefits of holding

Question

Which of the following is incorrect regarding the costs and benefits of holding inventories and cash?

?The benefit of higher inventory levels is the reduction in order costs associated with restocking and the reduced chances of running out of material.
?The costs of higher inventory levels are the carrying costs, which include the cost of space, insurance, spoilage, and the opportunity cost of the capital tied up in inventory.
?Cash provides liquidity, but it doesn't pay interest. Securities pay interest, but you can't use them to buy things.
?As financial manager you want to hold cash up to the point where the incremental or marginal benefit of liquidity is 25% higher than the cost of holding cash, that is, the interest that you could earn on securities.

Explanation / Answer

Correct answer is: As financial manager you want to hold cash up to the point where the incremental or marginal benefit of liquidity is 25% higher than the cost of holding cash, that is, the interest that you could earn on securities.

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