Fm10e ch19
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    Fm10e ch19 Fm10e ch19 Presentation Transcript

    • Chapter 19 - Cash and Marketable Securities Management  2005, Pearson Prentice Hall
    • Liquid Asset Management
      • CASH - motives for holding cash:
      • Transactions : to meet cash needs that arise from doing business.
      • Precautionary : having cash on hand for unexpected needs.
      • Speculative : to take advantage of potential profit-making situations.
    • Cash Management
      • CASH :
      • Trade Off : cash decreases risk of insolvency, but earns no returns!
    • Cash Management
      • CASH :
      • Objectives :
      • have enough cash on hand to meet disbursal needs.
      • minimize investment in idle cash balances.
    • Cash Management
      • Managing Cash Inflow
      • Reducing Float can speed up cash receipts.
      • Mail Float : length of time from the moment a customer mails a check until the firm begins to process it.
      • Processing Float : the time required by a firm to process a check before it can be deposited in a bank.
    • Cash Management
      • Managing Cash Inflow
      • Reducing Float can speed up cash receipts.
      • Transit Float : time required for a check to clear through the banking system and become usable funds.
      • Disbursing Float : occurs because funds are available in a firm’s bank account until its payment check has cleared through the banking system.
    • Cash Management
      • Managing Cash Inflow
      • Lockbox System
      • Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box.
      • A commercial bank collects and deposits the checks.
      • This reduces mail float, processing float and transit float.
    • Cash Management
      • Lockbox System benefits:
      • Increased working cash - reduces time required to convert receivables to cash.
      • Elimination of clerical functions - bank handles receiving, endorsing, totaling and depositing.
      • Early knowledge of dishonored checks - firm learns of customers’ bad checks faster.
    • Cash Management
      • Managing Cash Inflow
      • Preauthorized Checks (PACs)
      • Arrangement that allows firms to create checks to collect payments directly from customer accounts.
      • This reduces mail float and processing float.
    • Cash Management
      • PAC System benefits:
      • Highly predictable cash flows.
      • Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs.
      • Customer preference - eliminates regular billing for customers.
      • Increased working cash - dramatically reduces mail float and processing float.
    • Cash Management
      • Managing Cash Inflow
      • Depository Transfer Checks (DTCs)
        • Moves cash from local banks to concentration bank accounts.
        • Firms avoid having idle cash in multiple banks in different regions of the country.
    • Cash Management
      • DTC System benefits:
      • Lower levels of excess cash .
      • Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs.
      • Customer preference - eliminates regular billing for customers.
      • Increased working cash - dramatically reduces mail float and processing float.
    • Cash Management
      • Managing Cash Inflow
      • Wire Transfers
      • Moves cash quickly between banks.
      • Eliminates transit float .
    • Cash Management
      • Managing Cash Outflow
      • Zero Balance Accounts (ZBAs)
      • Different divisions of a firm may write checks from their own ZBA.
      • Division accounts then have negative balances.
      • Cash is transferred daily from the firm’s master account to restore the zero balance.
      • Allows more control over cash outflows.
    • Cash Management
      • Managing Cash Outflow
      • Payable-Through Drafts (PTDs)
      • Allows the firm to examine checks written by the firm’s regional units.
      • Checks are passed on to the firm, which can stop payment if necessary.
    • Cash Management
      • Managing Cash Outflow
      • Remote Disbursing
      • Firm writes checks on a bank in a distant town.
      • This extends disbursing float.
      • (Discouraged by the Federal Reserve System)
    • Marketable Securities
      • Considerations
      • Financial Risk - uncertainty of expected returns due to changes in issuer’s ability to pay.
      • Interest rate risk - uncertainty of expected returns due to changes in interest rates.
    • Marketable Securities
      • Considerations
      • Liquidity - ability to transform securities into cash.
      • Taxability - taxability of interest income and capital gains.
      • Yield - influenced by the previous four considerations.
    • Marketable Securities
      • Types
      • Treasury Bills - short-term securities issued by the U.S. government.
    • Marketable Securities
      • Types
      • Federal Agency Securities - Debt issued by agencies, including:
        • Federal National Mortgage Association (Fannie Mae)
        • Federal Home Loan Banks
        • Federal Land Banks
        • Federal Intermediate Credit Banks
        • Banks for the Cooperatives
    • Marketable Securities
      • Types
      • Bankers’ Acceptances - short-term securities used in international trade. Sold on discount basis.
      • Negotiable CDs - short-term securities issued by banks, with typical deposits of $100,000, $500,000 and $1 million.
    • Marketable Securities
      • Types
      • Commercial Paper - short-term unsecured “IOUs” sold by large reputable firms to raise cash.
      • Repurchase Agreements - an investor acquires short-term securities subject to a commitment from a bank to repurchase the securities on a specific date.
    • Marketable Securities
      • Types
      • Money Market Mutual Funds - a pool of money market securities, divided into shares, which are sold to investors.