Chapter 28 Cash Management

1
Chapter 28 Cash Management

• 28.1 Reasons for Holding Cash
• 28.2 Determining the Target Cash Balance
• 28.3 Managing the Collection and Disbursement of
  Cash
• 28.4 Investing Idle Cash
• 28.5 Summary and Conclusions
• Appendix 28A Adjustable Rate Preferred Stock,
  Auction Rate Preferred Stock, and Floating Rate
  Certificates of Deposit

2
The Baumol Cash Management Model

• Cost of Holding Cash (T/C) K
• Trading Cost (T/C) F
• The Optimal Target Cash Balance (C)
• C (2TF/ K)1/2
• Notations
• F Fixed costs of selling securities
• T Total amount of new cash needed per period
• K Interest rate on marketable securities per
  period
• C Cash Balance

3
The Miller-Orr Cash Management Model

• The Optimal Target Cash Balance (Z)
• Z (3Fs2 / 4K)1/3 L
• The Optimal Upper Limit of Cash Balance (H)
• H 3Z - 2L
• Average Cash Balance (4Z - L) /3
• Notations
• L Lower limit of cash balance
• F Fixed costs of selling securities
• K Daily interest rate on marketable securities

4
Float Management

• Strategies to reduce collection float
• Lockboxes
• Concentration Banking
• Wire Transfers
• Strategies to increase disbursement float
• Use a geographically distant bank
• Zero-balance account
• Drafts

5
Characteristics of Money Market Securities

• Maturity
• Default Risk
• Marketability (Liquidity)
• Tax Status
• Examples of Money Market Securities
• Repurchase Agreements (less than 30 days)
• Negotiable CD's
• Commercial Paper
• Eurodollar Securities
• Treasury Bills
• Bankers' Acceptances