Ross5eChap28sm - Chapter 28: Cash Management 28.1 Yes. Once...

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Chapter 28: Cash Management 28.1 Yes. Once a firm has more cash than it needs for operations and planned expenditures, the excess cash has an opportunity cost. It could be invested (by shareholders) in potentially more profitable ways. If it has too much cash it can simply pay a dividend, or, more likely in the current financial environment, buy back stock. It can also reduce debt. If it has insufficient cash, then it must either borrow, sell stock, or improve profitability. 28.2 In the case of Microsoft, the company’s reason given for holding cash was to pay for potential settlements in its monopoly cases brought by the U.S. government and the European Union. 28.3 a. Decrease. This will lower the trading costs, which will cause a decrease in the target cash balance. b. Decrease. This will increase the holding cost, which will cause a decrease in the target cash balance. c. Increase. This will increase the amount of cash that the firm has to hold in non– interest bearing accounts, so they will have to raise the target cash balance to meet this requirement. d. Decrease. If the credit rating improves, then the firm can borrow more easily, allowing it to lower the target cash balance and borrow if a cash shortfall occurs. e. Increase. If the cost of borrowing increases, the firm will need to hold more cash to protect against cash shortfalls as its borrowing costs become more prohibitive. f. Decrease. This depends somewhat on what the fees apply to, but if direct fees are established, then the compensating balance may be lowered, thus lowering the target cash balance. If, on the other hand, fees are charged on the number of transactions, then the firm may wish to hold a higher cash balance so they are not transferring money into the account as often. 28.4 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 dollaramounts) on the cash balances, first find the weekly interest rate 0008077 . 0 52 042 . 0 = = r and apply this to each of the weekly amounts: Week Avg Cash Balance $ Earned Answers to End–of–Chapter Problems B–146
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1 240,000 193.38 2 231,000 186.58 3 295,500 238.67 4 195,000 157.50 Avg monthly $961500 $776.13 Average annual earnings = $776.13 x 12= $9313.56 Note: this assumes interest is not compounded. The question does not specify what compounding assumptions should be made. Alternatively: With compounding, the annual interest in the average balance would be calculated as follows: Average weekly balance =$240,375(240,000+231,000+295,500+195,000/4) $240,375[(1+0.042/52) 52 – 1]= $10,306.52. The difference is due to compounding
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This note was uploaded on 06/03/2011 for the course BUSINESS bu383 taught by Professor Marshal during the Winter '11 term at Wilfred Laurier University .

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Ross5eChap28sm - Chapter 28: Cash Management 28.1 Yes. Once...

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