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.