Chap007 - Chapter 07 Current Asset Management Chapter 7...

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Chapter 07: Current Asset Management Chapter 7 Current Asset Management Discussion Questions 7-1. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit? Cash and marketable securities are generally used to meet the transaction needs of the firm and for contingency purposes. Because the funds must be available when needed, the primary concern should be with safety and liquidity rather than the maximum profits. 7-2. Explain the similarities and differences of lockbox systems and regional collection offices. Both lockbox systems and regional collection offices allow for the rapid processing of checks that originate at distant points. The difference is that a regional collection center requires the commitment of corporate resources and personnel to staff an office, while a lockbox system requires only the use of a post office box and the assistance of a local bank. Clearly, the lockbox system is less expensive. 7-3. Why would a financial manager want to slow down disbursements? By slowing down disbursements or the processing of checks against the corporate account, the firm is able to increase float and also to provide a source of short-term financing. 7-4. Use The Wall Street Journal or some other financial publication to find the going interest rates for the list of marketable securities in Table 7-1 on page 200. Which security would you choose for a short-term investment? Why? The answer to this question may well depend upon the phase of the business cycle at the time the question is considered. In normal times, small CDs and savings accounts may prove adequate. However, in a tight money period, wide differentials may be established between the various instruments and maximum returns may be found in Treasury bills, large CDs, commercial paper, and money market funds. 7-1
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Chapter 07: Current Asset Management 7-5. Why are Treasury bills a favorite place for financial managers to invest excess cash? Treasury bills are popular because of the large and active market in which they trade. Because of this, the investor may literally pinpoint the maturity desired choosing anywhere from one day to a year. The "T-bill" market provides maximum liquidity and can absorb almost any dollar amount of business. 7-6. Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration? An investment in accounts receivable requires a commitment of funds as is true of any other investment. The key question is: Will the dollar returns from the resource commitment provide a sufficient rate of return to justify the investment? There is no such thing as too many or too few bad debts, only too low a return on capital.
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This note was uploaded on 01/31/2012 for the course FINC 3343 taught by Professor Terry during the Spring '11 term at University of Arkansas at Little Rock.

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Chap007 - Chapter 07 Current Asset Management Chapter 7...

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