fm28 2 - 28-4 a Better synchronization of cash inflows and...

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Answers and Solutions: 28 - 2 28-2 a. Our suppliers switch from delivering - by train to air freight. (a below) b. We change from producing just in time to meet seasonal sales to steady, year-round + production. c. Competition in the markets in which 0 we sell increases. (c below) d. The rate of general inflation increases. 0 e. Interest rates rise; other things - are constant. (e below) (a) Lower safety stock will be required because delivery time is shortened. (c) On the one hand, the need to stay competitive may require large inventories, but if the market gets competitive, sales may fall off and the need for inventories may diminish. (e) EOQ and inventories are lower, since carrying costs are higher. 28-3 When money is tight, interest rates are generally high. This means that near-cash assets have high returns; hence, it is expensive to hold idle cash balances. Firms tend to economize on their cash balance holdings during tight-money periods.
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Unformatted text preview: 28-4 a. Better synchronization of cash inflows and outflows would allow the firm to keep its transactions balance at a minimum, and would therefore lower the target cash balance. b. Improved sales forecasts would tend to lower the target cash balance. c. A reduction in the portfolio of U.S. Treasury bills (marketable securities) would cause the firm’s cash balance to rise if the Treasury bills had been held in lieu of cash balances. d. An overdraft system will enable the firm to hold less cash. e. If the amount borrowed equals the increase in check-writing, the target cash balance will not change. Otherwise, the target cash balance may rise or fall, depending on the relationship between the amount borrowed and the number of checks written. f. The firm will tend to hold more Treasury bills, and the target cash balance will tend to decline....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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