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CHAPTER 19
CASH AND LIQUIDITY MANAGEMENT
Answers to Concepts Review and Critical Thinking Questions
6. Such instruments go by a variety of names, but the key feature is that the dividend adjusts, keeping
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11. A potential advantage is that the quicker payment often means a better price. The disadvantage is that
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
1. The average daily float is the average value of checks received per day times the average number of
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The net float is the disbursement float plus the collection float, so:
b. The average daily float is the total float divided by the number of days in a month. Assuming 30
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5. The average daily collections are the number of checks received times the average value of a check,
so:
The firm should take the lockbox service.
6. a. The average daily float is the sum of the percentage each check amount is of the total checks
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b. The total collections are the sum of the percentage of each check amount received times the total
checks received times the amount of the check, so:
e. The most the firm should pay is the change in the average daily float. Under the reduced
collection time assumption, we get:
7. a. The present value of adopting the system is the number of days collections are reduced times the
average daily collections, so:
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b. The NPV of adopting the system is the present value of the savings minus the cost of adopting
8. a. The reduction in cash balance from adopting the lockbox is the number of days the system
b. The dollar return that can be earned is the average daily interest rate times the cash balance
reduction. The average daily interest rate is:
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If the lockbox payments occur at the end of the month, we need the effective monthly interest
9. The interest that the company could earn will be the amount of the checks times the number of days it
10. The benefit of the new arrangement is the $5 million in accelerated collections since the new system
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Intermediate
11. To find the NPV of taking the lockbox, we first need to calculate the present value of the savings. The
12. To find the minimum number of payments per day needed to make the lockbox system feasible is the
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APPENDIX 19A
2. The target cash balance using the BAT model is:
3. The holding cost is the average daily cash balance times the interest rate, so:
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The target cash balance using the BAT model is:
4. a. The opportunity costs are the amount transferred times the interest rate, divided by two, so:
b. The target cash balance using the BAT model is:
5. The total cash needed is the cash shortage per month times 12 months, so:
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The company should invest:
6. The lower limit is the minimum balance allowed in the account, and the upper limit is the maximum
balance allowed in the account. When the account balance drops to the lower limit:
7. The target cash balance using the Miller-Orr model is:
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of marketable securities. The proceeds from the sale are used to replenish the account back to the
optimal target level of C*. Conversely, when the upper limit is reached, the firm buys:
8. As variance increases, the upper limit and the spread will increase, while the lower limit remains
10. Using the BAT model and solving for R, we get:
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