PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 18, Problem 14PS
Agency costs* Let us go back to Circular File’s market value balance sheet:
Who gains and who loses from the following maneuvers?
- a. Circular scrapes up $5 in cash and pays a cash dividend.
- b. Circular halts operations, sells its fixed assets, and converts net working capital into $20 cash. Unfortunately the fixed assets fetch only $6 on the secondhand market. The $26 cash is invested in Treasury bills.
- c. Circular encounters an acceptable investment opportunity,
NPV = 0, requiring an investment of $10. The firm borrows to finance the project. The new debt has the same security, seniority, etc., as the old. - d. Suppose that the new project has NPV = +$2 and is financed by an issue of
preferred stock . - e. The lenders agree to extend the maturity of their loan from two years to three in order to give Circular a chance to recover.
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PROBLEM
The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment. They have determined that the cost of either investing in or selling marketable securities is $100. By looking at Book Warehouse’s past cash needs, they have determined that the variance of daily cash flows is $20,000. Book Warehouse’s opportunity cost of cash, per day, is estimated to be 0.03%. Based on experience, management has determined that the cash balance should never fall below $10,000.
4. How much is the variance of daily cash flows?(Use a number, no decimal value, no commas, no currency, no space) *
5. How much is the lower limit based on the Miller-Orr model of cash management? (Use a number, no decimal value, no commas, no currency, no space) *
6. How much is the opportunity cost of cash, per day? (Use a number, must be in decimal form. eg. 6.3%/100, encode 0.063 , no commas, no currency, no space) *
PLEASE ANSWER ALL QUESTIONS. THANKS!
Baumol Model and Miller-Orr Model
1. The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment. They have determined that the cost of either investing in or selling marketable securities is $100. By looking at Book Warehouse’s past cash needs, they have determined that the variance of daily cash flows is $20,000. Book Warehouse’s opportunity cost of cash, per day, is estimated to be 0.03%. Based on experience, management has determined that the cash balance should never fall below $10,000. Calculate the lower limit, the return point, and the upper limit based on the Miller-Orr model of cash management.
The management of the Keribels Company wishes to apply the Miller-Orr model to manage its cash investments. They have determined that the cost of either investing in or selling marketable securities is P 100. By looking at the Keribels Company’s past cash needs, they have determined that the variance of daily cash flow is P 75,000. Keribels Company’s opportunity cost of cash per day is 0.05%. Based on their experience the cash balance should not fall below P 50,000. WHAT IS THE LOWER LIMIT? (Use a number, no decimal value, no currency, no space, no commas) *
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Here are book and market value balance...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Prob. 5PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Prob. 7PSCh. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Bankruptcy costs On February 29, 2019, when PDQ...Ch. 18 - Financial distress This question tests your...
Ch. 18 - Prob. 12PSCh. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 20PSCh. 18 - Pecking-order theory Fill in the blanks: According...Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Financial slack True or false? a. Financial slack...Ch. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 26PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- The management of the Keribels Company wishes to apply the Miller-Orr model to manage its cash investments. They have determined that the cost of either investing in or selling marketable securities is P 100. By looking at the Keribels Company’s past cash needs, they have determined that the variance of daily cash flow is P 75,000. Keribels Company’s opportunity cost of cash per day is 0.05%. Based on their experience the cash balance should not fall below P 50,000. WHAT IS THE UPPER LIMIT?arrow_forwardThe A Company wishes to apply the Miller-Orr model to manage its cash investment. A's management has determined that the cost of either investing in or selling marketable securities is $200. By looking at A Company’s past cash needs, they have determined that the variance of daily cash flows is $10,000. A Company’s opportunity cost of cash, per day, is estimated to be 0.05%. A management has figured, based on their experience dealing with the cash flows of the company, that there should be a cushion— a safety stock—of cash of $20,000. Calculate the lower limit, the return point, and the upper limit based on the Miller-Orr model of cash management.arrow_forwardPROBLEM The Seminole Company wishes to apply the Miller-Orr model to manage its cash investment. Seminole’s management has determined that the cost of either investing in or selling marketable securities is $200. By looking at Seminole Company’s past cash needs, they have determined that the variance of daily cash flows is $10,000. Seminole Company’s opportunity cost of cash, per day, is estimated to be 0.05%. Seminole management has figured, based on their experience dealing with the cash flows of the company, that there should be a cushion— a safety stock—of cash of $20,000. 4. How much is the lower limit based on the Miller-Orr model of cash management?(Use a number, no decimal value, no commas, no currency, no space) * 5. How much is the upper limit based on the Miller-Orr model of cash management? (Use a number, no decimal value, no commas, no currency, no space) * 6.How much is the return point based on the Miller-Orr model of cash management? (Use a number, no decimal value, no…arrow_forward
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