Ross4eChap28sm

Ross4eChap28sm - Chapter 28: Cash Management 28.1 a. b....

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Chapter 28: Cash Management 28.1 Firms need to hold cash to: a. Satisfy the transaction needs. For example, cash is collected from sales and new financing and disbursed as wages, salaries, trade debts, taxes and dividends. b. Maintain compensating balances. A minimum required compensating balance at banks providing credit service to the firm may impose a lower limit on the level of cash a firm holds. 28.2 a. Decrease. Examine the Baumol model. As the interest rate (k) increases, the optimal cash balance must decrease. b. Increase. Examine the Baumol model. As brokerage costs (F, the per transaction costs) rise, the optimal balance increases. c. Decrease. If the cost of borrowing falls, a firm need not hold as much of its assets as cash because the cost of running short (borrowing to fill cash needs) is lower. d. Increase. As a firm’s credit rating falls, its cost to borrow increases. Thus, the firm cannot as easily afford to run short of cash and its cash balance must be higher. e. Increase. Introduction of direct banking fees would increase the fixed costs associated with holding cash. As fixed costs rise, the optimal balance must also rise. 28.3 Globalization, deregulation and financial engineering have made financial management a much more complex and technical activity. Technology has enabled firms to be more efficient in cash management. The potential sources and types of investment vehicles have increased dramatically. 28.4 In order to determine weekly earnings (sometimes the word "return" is used to mean dollar amounts) on the cash balances, first find the weekly interest rate .03 .0005769 52 r = = and apply this to each of the weekly amounts: Week Avg Cash Balance $ Earned 1 24,000 13.85 2 34,000 19.61 3 10,000 5.77 4 15,000 8.65 Avg monthly 83,000 47.88 Average annual earnings = 47.88 x 12 = $ 574.56 Answers to End-of-Chapter Problems B-146
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Note: this assumes interest is not compounded. The question does not specify what compounding assumptions should be made. Alternatively:
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This note was uploaded on 03/17/2009 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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Ross4eChap28sm - Chapter 28: Cash Management 28.1 a. b....

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