FUND.OF CORPORATE FINANCE(LL)
11th Edition
ISBN: 9781260443714
Author: Ross
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 19.A, Problem 6QP
Summary Introduction
To determine: The meaning of upper limit, lower limit, and the target cash balance under the Miller‑Orr model.
Introduction:
Target cash balance refers to the level of cash that the company should maintain to determine the tradeoff between the carrying costs of cash and its adjustment or shortage costs. The carrying costs indicate the
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
The cash-management process includes three elements: (1) controlling the cash-collectionand cash-disbursement process, (2) managing the available cash balances, and (3) investingthose balances in short-term instruments. Suppose you are a Fund Manager at one of thedistricts in Zambia and you have just received a K1000, 000 for salaries and operations forthe entire year.
a. Explain 5 various options you can use to manage cash balances. State theadvantages and disadvantages of each of the options you identified.
b. Identify 7 instruments in which you can invest the balance. State the advantages anddisadvantages of each of the instruments you have identified.
Of vital importance to the company’s operations is the efficient management of its cash resources.
Consequently your are asked to look into the cash management procedures and prepare an appropriate report.
The following information is relevant for the current period:
Opening Cash Balance $ 30,000
Required Minimum Cash Balance $ 20,000
Payment of Income taxes – 2nd Quarter $ 4,000
Professional Salaries;
1st Quarter $ 145,000
2nd Quarter $ 145,000
Interest from Investments- 2nd Quarter $ 7,000
Overhead Costs
1st Quarter $ 95,000
2nd Quarter $ 120,000
Selling & Administration Costs
1st Quarter $ 50,000
2nd Quarter…
A company has received a proposal from a manager asking to spend ₱1,500,000on equipment that will result in cash inflows as indicated in the table below:Year Cash Flow1 150,0002 150,0003 200,0004 600,0005 900,000What is the payback period if averaging and subtracting methods are used?
Chapter 19 Solutions
FUND.OF CORPORATE FINANCE(LL)
Ch. 19.1 - What is the transaction motive, and how does it...Ch. 19.1 - What is the cost to the firm of holding excess...Ch. 19.2 - Which would a firm be most interested in reducing,...Ch. 19.2 - Prob. 19.2BCQCh. 19.2 - Prob. 19.2CCQCh. 19.3 - Prob. 19.3ACQCh. 19.3 - Prob. 19.3BCQCh. 19.4 - Prob. 19.4ACQCh. 19.4 - What is a zero-balance account? What is the...Ch. 19.5 - What are some reasons why firms find themselves...
Ch. 19.5 - Prob. 19.5BCQCh. 19.5 - Why are money market preferred stocks an...Ch. 19.A - Prob. 1ACQCh. 19.A - Prob. 2BCQCh. 19.A - Describe how the MillerOrr model works.Ch. 19.A - Changes in Target Cash Balances Indicate the...Ch. 19.A - Using the BAT Model Given the following...Ch. 19.A - Prob. 3QPCh. 19.A - Prob. 4QPCh. 19.A - Determining Optimal Cash Balances The All Day...Ch. 19.A - Prob. 6QPCh. 19.A - Prob. 7QPCh. 19.A - Interpreting MillerOrr Based on the MillerOrr...Ch. 19.A - Prob. 9QPCh. 19.A - Using BAT Rise Against Corporation has determined...Ch. 19 - Prob. 19.1CTFCh. 19 - Prob. 19.2CTFCh. 19 - Prob. 19.3CTFCh. 19 - Prob. 1CRCTCh. 19 - Prob. 2CRCTCh. 19 - Prob. 3CRCTCh. 19 - Prob. 4CRCTCh. 19 - Prob. 5CRCTCh. 19 - Prob. 6CRCTCh. 19 - Collection and Disbursement Floats [LO1] Which...Ch. 19 - Prob. 8CRCTCh. 19 - Prob. 9CRCTCh. 19 - Prob. 10CRCTCh. 19 - Prob. 11CRCTCh. 19 - Prob. 12CRCTCh. 19 - Prob. 13CRCTCh. 19 - Prob. 1QPCh. 19 - Calculating Net Float [LO1] Each business day, on...Ch. 19 - Prob. 3QPCh. 19 - Float and Weighted Average Delay [LO1] Your...Ch. 19 - NPV and Collection Time [LO2] Your firm has an...Ch. 19 - Using Weighted Average Delay [LO1] A mail-order...Ch. 19 - Prob. 7QPCh. 19 - Lockboxes and Collections [LO2] It takes Cookie...Ch. 19 - Prob. 9QPCh. 19 - Prob. 10QPCh. 19 - Prob. 11QPCh. 19 - Calculating Transactions Required [LO2] Cow Chips,...Ch. 19 - Prob. 1MCh. 19 - Prob. 2MCh. 19 - Prob. 3M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Using a Spreadsheet to Prepare a Statement of Cash Flows Jane Bahr, a controller of Endicott & Thurston, prepared the following balance sheets at the end of 2019 and 2018: Required: 1. Using a spreadsheet, prepare a statement of cash flows for 2019. Assume Endicott & Thurston use the indirect method. 2. CONCEPTUAL CONNECTEON Discuss whether Endicott & Thurston appear to have matched the timing of inflows and outflows of cash.arrow_forwardThe following four suggestions have been made to improve the company’s cash position. Evaluate the effect on cash flow for each of the four suggestions. After evaluating each suggestion, enter the projected cash balances in the spaces provided. Consider each suggestion separately. Reset cells to their initial values after each new suggestion. Seek agreement with suppliers to extend the credit period to 30 days. This would mean that all current monthly purchases would be paid for in the following month. Raise the unit price from $28 to $30. A price increase will reduce unit sales by 10% each month. Unit purchases will also be reduced by 10%. Put the company’s two salespeople on straight commission. This would reduce fixed marketing and administrative costs to $1,500 per month and raise variable marketing and administrative costs to $7 per unit. Increase the cash discount from 5% to 10%. It is anticipated that this would increase the percentage of customers paying within the discount period to 85%, and those paying the month after the discount period would drop to 8%. Five percent would pay in the following month and 2% would still be uncollectible. What are your recommendations for Sweet Pleasures, Inc.? Consider potential impact on profits as well as cash balances.arrow_forwardOptimal Cash Transfer Barenbaum Industries projects that cash outlays of 4.5 million will occur uniformly throughout the year. Barenbaum plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The firms marketable securities are invested to earn 12%, and the cost per transaction of converting securities to cash is 27. a. Use the Baumol model to determine the optimal transaction size for transfers from marketable securities to cash. b. What will be Barenbaums average cash balance? c. How many transfers per year will be required? d. What will be Barenbaums total annual cost of maintaining cash balances? What would the total cost be if the company maintained an average cash balance of 50,000 or of 0 (it deposits funds daily to meet cash requirements)?arrow_forward
- A bookstore is planning to purchase an automated inventory/remote marketing system, which includes an upgrade to a more sophisticated cash register system. The package has an initial investment cost of $360,000. It is expected to generate $144,000 of annual cash flows, reduce costs and provide incremental cash revenues of $326,000, and incur incremental cash expenses of $200,000 annually. What is the payback period and accounting rate of return (ARR)?arrow_forwardChoose the letter of the correct asnwer: Callous Company reported the following accounts on December 31, 2020: Cash on hand - 200,000;' Petty cash fund - 20,000; Philippine Bank current account - 5,000,000; City Bank current account No. 1 - 4,000,000; City Bank current account No. 2 (overdraft) - (100,000); Asia Bank saving account - 250,000;Asia Bank time deposit, 90 days - 2,000,000;* Additional data: > Cash on hand included the following items: Customer check for P35,000 returned by bank December 26, 2020 due to insufficient fund but subsequently redeposited and cleared by the bank on January 10, 2021. > Customer check for P15,000 dated January 10, 2021, received December 23, 2020.> The petty cash fund consisted of the following items: Currency and coins - 5,000; IOUs from officers - 2,000; Unreplenished petty cash vouchers 12,000.> Included among the checks drawn by Callous Company against the Philippine Bank current account and recorded in December 2020 were the…arrow_forwardABC Corporation would like to know what its optimal cash balance for its petty cash fund. The daily average disbursement is P5,000. ABC operates 365 days a year. Cost to transfer money into the account average P250 each time. If the money is not in this account, it could have been in an investment account earning 5% per year. Requiired: 1. Optimum cash balance 2. Total cost of holding and maintaining the optimal cash balancearrow_forward
- The XNPV function can calculate NPV for any (possibly irregular) series of cash flows. Look this function up in Excel’s online help. Then use it to develop a spreadsheet model that finds the NPV of the following series: a payment of $25,000 today (assumed to be June 15, 2017), and cash inflows of $10,000 on March 1, 2018; $15,000 on September 15, 2018; $8000 on January 20, 2019; $20,000 on April 1, 2019; and $10,000 on May 15, 2019. Discount these back to “today” using a discount rate of 12%arrow_forwardParadise Retailers, Inc. (PRI) determined that $1,500,000 is needed for cash transactions made during the next year. Each time PRI deposits money in its checking account, a charge of $12.95 is assessed to cover clerical costs. If PRI can hold marketable securities that yield 4.5%, and then convert these securities to cash at a cost of only the $12.95 deposit charge, what is the optimal cash amount C* to transfer from marketable securities to the checking account according to the Baumol Model?arrow_forwardHi, do you agree with the net cash flow in investing activities amount, or did you receive a different amount? I got $682,000, but the last reviewer thinks the total is -$534,000. Also, could you let me know if I need the retained earnings section for my assignment to calculate cash flows? I am trying to get my cashflow statement to equal the difference in cash of $86,000. Assets 20X1 20X0 Difference Current assets Cash $450,000.00 $364,000.00 $86,000 Accounts receivable—net 692,000 625,000 $67,000 Inventory 723,000 610,000 $113,000 Prepaid expenses 50,000 70,000 ($20,000) Total current assets 1,915,000 1,669,000 $246,000 Long-term investments 150,000 20,000 $130,000 Property, plant, and equipment 1,622,000 815,000 $807,000 Less: Accumulated depreciation -100,000 -75,000 ($25,000) 1,522,000 740,000 $782,000 Total assets $3,587,000 $2,429,000 $1,158,000 Liabilities and…arrow_forward
- The XYZ customer service branch maintains a disbursement account which is funded by the main office. The branch needs funds for daily disbursements of P40,000 and a minimum balance of P20,000. The cost to transfer funds from the main office to the branch averages P300. The return on money marketable securities is 5%. If the entity uses a 250-day year for financial analysis, how much is the optimal cash amount to be requested by the branch each time?arrow_forwarda. Paradise Retailers, Inc. (PRI) determined that $1,500,000 is needed for cash transactions made during the next year. Each time PRI deposits money in its checking account, a charge of $12.95 is assessed to cover clerical costs. PRI can hold marketable securities that yield 4.5%, and then convert these securities to cash at a cost of only the $12.95 deposit charge. Optimal Cash Amount = 29382.53 PRI’s financial managers have not been following the Baumol Model. Instead, they have been transferring cash from marketable securities less frequently, namely, transferring cash every three weeks. What total cash cost including holding costs and transactions costs could PRI save by transferring the optimal cash amount C* rather than this larger transfer amount?arrow_forwardGiven the following information about cash management of the Evergreen Company: Average cash payment is $120,000 per month. The company invests spare cash in Treasury Bills at an annual interest rate of 3.90%. The cost of each transaction of Treasury bills is $25. What is the average cash balance of the Evergreen Company? (no excel pls) a. $21,483 b. $12,403 c. $8,771 d. $15,191 e. $42,967arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
Cornerstones of Financial Accounting
Accounting
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
The KEY to Understanding Financial Statements; Author: Accounting Stuff;https://www.youtube.com/watch?v=_F6a0ddbjtI;License: Standard Youtube License