Cash

ManagementPrinciples

ofCorporateFinanceSeventh

EditionRichard

A.

BrealeyStewart

C.

MyersSlides

byMatthew

WillChapter

31McGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reserved31-

2Topics

CoveredMcGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reservedCash

Collection

and

Disbursement

Systems

ManagingFloatHow

Much

Cash

Should

the

Firm

Hold?Investing

Idle

CashMoney

Market

InvestmentsFloating

Rate

Preferred

Stock31-

3FloatTime

exists

between

the

moment

a

check

is

writtenand

the

moment

the

funds

are

deposited

in

therecipient’s

account.This

time

spread

is

called

Float.Payment

Float

-

Checks

written

by

a

company

thathave

not

yet

cleared.Availability

Float

-

Checks

already

deposited

thathave

not

yet

cleared.McGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reserved31-

4FloatPayment

Float

illustration

-

The

company

issues

a$200,000

check

that

has

not

yetcleared.Company’s

ledger

balance$800,000+Payment

float$200,000equalsBank’s

ledgerbalance$1,000,000McGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reserved31-

5FloatAvailability

Float

illustration

-

The

companydeposits

a

$100,000

check

that

has

not

yetcleared.Company’s

ledger

balance$900,000+Payment

float$200,000equalsBank’s

ledgerbalance$1,100,000McGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reserved31-

6FloatNet

FloatillustrationNet

float

=

payment

float

-

availabilityfloatAvailable

balance$1,000,000+Availability

float$100,000equalsBank’s

ledgerbalance$1,100,000McGraw

Hill/IrwinCopyright

?

2003

by

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Companies,Inc.

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rights

reserved31-

7Managing

FloatMcGraw

Hill/IrwinCopyright

?

2003

by

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Companies,Inc.

All

rights

reservedPayers

attempt

to

create

delays

in

the

checkclearing

process.Recipients

attempt

to

remove

delays

in

thecheck

clearing

process.Sources

of

delay

Time

it

takes

to

mailcheck

Time

for

recipient

to

process

check

Time

for

bank

to

clear

check31-

8Managing

FloatCheck

mailedPresentationfloatCash

availableto

recipientCheck

charged

topayer’saccountAvailabilityfloatCheck

receivedMail

floatCheck

depositedProcessing

floatMcGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

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rights

reserved31-

9Managing

FloatMcGraw

Hill/IrwinCopyright

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2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reservedConcentration

Banking

-

system

whereby

customersmake

payments

to

a

regional

collection

center

whichtransfers

the

funds

to

a

principalbank.Lock-Box

System

-

System

whereby

customers

sendpayments

to

a

post

office

box

and

a

local

bankcollects

and

processes

checks.Zero-Balance

Accounts

-

Regional

bank

accounts

towhich

just

enough

funds

are

transferred

daily

to

payeach

day’sbills.31-10Money

MarketsMcGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reservedMoney

Market

-

market

for

short

termfinancial

assets.

commercial

paper

certificates

ofdeposit

repurchase

agreements31-11Inventories

& Cash

BalancesEconomic

Order

Quantity

-

Order

sizethatminimizes

total

inventory

costs.McGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reserved31-12Inventories

& Cash

BalancesInventory

costs,

dollarsMcGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reservedOrdersizeDetermination

of

optimal

order

sizeTotal

costsCarrying

costsTotal

ordercostsOptimalorder

size31-13Inventories

& Cash

BalancesThe

optimal

amount

of

short

term

securities

sold

toraise

cash

will

be

higher

when

annual

cash

outflowsare

higher

and

when

the

cost

per

sale

of

securities

ishigher. Conversely,

the

initial

cash

balance

fallswhen

the

interest

is

higher.McGraw

Hill/IrwinCopyright

?

2003

by

TheMcGraw-Hill

Companies,Inc.

All

rights

reserved31-14Inventories

& Cash

Balances2

x

annual

cash

disbursement

x

cost

per

saleinterest

rate2

x

1260