88
© Pearson Education Limited 2008
Cash and Marketable Securities Management
Money is like muck, not good except it be spread.
FRANCIS BACON
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition, Instructor’s Manual
89
© Pearson Education Limited 2008
ANSWERS TO QUESTIONS
1. Cash management involves the efficient collection and disbursement of cash and any
2. Concentration banking involves the movement of cash from lock-box or field banks into the
3. The
lock-box system may improve the efficiency of cash management by reducing the float.
4. The most important criterion for asset selection is safety of principal. Since the funds
5. Lock-box banking provides the financial manager an opportunity to contribute to the
6. In the “ready cash segment,” a major requirement is instant liquidity. These securities may
7. Compensating balances are a requirement imposed by a bank. Usually, the requirement is
expressed in terms of an average collected balance. Its purpose is to compensate the bank
8. Net float is the dollar difference between the balance shown in a firm’s checkbook balance
and the balance on the bank’s books. Until a check is collected at the bank, it is not
9. Marketable securities serve as a temporary investment for funds which later will be needed
Chapter 9: Cash and Marketable Securities Management
90
© Pearson Education Limited 2008
10. Cash inflows would need to be perfectly synchronized with cash outflows and there would
11. The three motives for holding cash are: (1) transactions to meet ordinary payments; (2)
12. Treasury bills are the most liquid securities available; they have tremendous marketability.
Moreover, they are risk free with respect to default. For these reasons they provide the
As a result, they yield more than bills. Both instruments serve the liquidity needs of the
13. Electronic commerce (EC) is the exchange of business information in an electronic (non-
paper) format. At the structured end of the EC spectrum, we find electronic data
interchange (EDI). EDI involves the transfer of business information (e.g., invoices,
14. Outsourcing consists of subcontracting a certain business operation to an outside firm,
instead of doing it “in-house.” As firms have increasingly focused on the core processes of
Reducing and controlling costs is a reason often cited for outsourcing a cash management
15. “Check 21” in the US created an opportunity for banks to save both time and money by
encouraging check truncation (removing original paper checks from the payment processing
Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition, Instructor’s Manual
91
© Pearson Education Limited 2008
SOLUTIONS TO PROBLEMS
1. a. $420,000 × 6 = $2,520,000.
b. Funds released = $420,000 × 2 = $840,000
2. a. $3m a day × 0.5 days = $ 1.5m saved in collections
b. $2m × .07 = $140,000 opportunity cost of maintaining
3. If the company were certain of the pattern shown, it would wish to have the following
deposits in its payroll account in order to cover the checks that were cashed:
Friday $ 30,000
Monday 60,000
If employee check cashing behavior is subject to fluctuations, the company will need to
maintain “buffer” cash in the account. The greater the uncertainty, the greater is the buffer
that will be needed.
Chapter 9: Cash and Marketable Securities Management
92
© Pearson Education Limited 2008
4. a. $5,000 × 41 stores × 6 days = $1,230,000
b. $15,000 × 41 = $615,000
c. Interest earned = $615,000 × 10% = $61,500
5. No specific solution recommended.
SOLUTIONS TO SELF-CORRECTION PROBLEMS
1. a. Total time savings = 2.5 + 1 = 3.5 days
c. Since the dollar gross benefit of the lock-box system ($87,500) exceeds the cost of the
lock-box system ($75,000), the system should be initiated.
2.
Security
Federal
Tax
State
Tax
Combined
Effect
After-Tax
Expected Return
Treasury bills .30 0 .30 (1 – .30) 8.00% = 5.60%
The money-market preferred is the most attractive after taxes, owing to the 70 percent
Preferred stock may not be the most attractive investment when risk is taken into account. There