Chapter 16 FIN

Chapter 16 FIN - Chapter 16 Cash: currency and coins plus...

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Chapter 16 Cash: currency and coins plus demand deposit accounts Marketable securities: security investments (financial assets) the firm can quickly convert to cash balances. Also known as near cash or near- cash assets Why a company holds cash The cash flow process Funds can be obtained in the financial markets from the sale of securities such as bonds, preferred stock, and common stock, or the firm can enter into nonmarketable-debt contracts with lenders such as commercial banks. Whereas the irregular cash inflows are from external sources, the other main sources of cash arise from internal operations and occur on a more regular basis. Apart from the investment of excess cash in near-cash assts, the cash balance experiences reductions for three key reasons - On an irregular basis, withdrawals are made to: 1. Pay cash dividends on preferred and common stock shares 2. Meet interest requirements on debt contracts 3. Repay the principal borrowed from creditors 4. Buy the firm’s own shares in the financial markets for use in executive compensation plans or as an alternative to paying a cash dividend 5. Pay tax bills - The company’s capital expenditure program designates that fixed assets be acquired at various intervals - Inventories are purchased on a regular basis to ensure a steady flow of finished goods rolls off the production line. Motives for Holding Cash Transaction Motive Balances held for transaction purposes allow the firm to meet its cash needs that arise in the ordinary course of doing business. Precautionary Motive
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Chapter 16 It relates to the maintenance of balances used to satisfy possible, but as yet unknown, needs. The cash flow predictability of the firm has a material influence on this precautionary motive. In actual practice, it is met to a large extent by the holding of a portfolio of liquid assets Speculative Motive Cash is held for speculative purposes in order to take advantage of potential profit-making situations. It is the least important component of a firm’s preference for liquidity. The transactions and precautionary motives account for most of the reasons why a company holds cash balances. Cash Management Objectives and Decisions The Risk-Return Trade-Off Firm must be concerned with insolvency: - The inability to meet interest payments or to repay debt at maturity The financial manager must strike an acceptable balance between holding too much cash and too little cash. Objectives
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This note was uploaded on 08/30/2011 for the course FIN 3310 taught by Professor Potts during the Fall '08 term at Baylor.

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Chapter 16 FIN - Chapter 16 Cash: currency and coins plus...

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