boken kap 27 del 1

Question 1

What does this stand for
C
C*
TC
L
Z*
P_0
C_0
NCF
H
?

Answer 1

C = Cash balance
C* = optimal cash balance
TC = total cost of cash-balance policy.
L = lower control limit
Z* = optimal target cash balance
P_0 = Price per unit received at time 0.
C_0 = cost per unit paid at time 0.
NCF = Net cash flow
h = Probability that customers will pay outstanding credit.

Question 2

What is the main thing about the Miller-Orr model?

Answer 2

The firm allows its cash balance to wander freely within the lower and upper limit. As long as the cash balance is between U and L, the firm makes no transactions.

Question 3

What are some other factors influencing the target cash balance?

Answer 3

• Borrowing, likely higher interest rate.
• Compensating balance.

Question 4

When is trade credit more likely to be granted?

Answer 4

If:
1. The selling firm has a cost advantage over other lenders.
2. The selling firm can engage in price discrimination.
3. The selling firm can obtain favorable tax treatment.
4. The selling firm has no established reputation for quality products or services.
5. The selling firm perceives a long-term strategic relationship.
6. The selling firm has more differentiated products.

Question 5

What are the five Cs of credit?

Answer 5

• Character: the customer’s willingness to meet credit obligations.
• Capacity: the ability to meet obligations.
• Capital: the customer’s financial reserves.
• Collateral: a pledged asset in the case of default.
• Conditions.

Question 6

What are the two primary reasons for holding cash?

Answer 6

To satisfy the transactions motive and maintain compensating balances.

Question 7

What is the main cost of holding cash?

Answer 7

The opportunity cost of lost interest.

Question 8

What is the purpose of the Baumol model?

Answer 8

To determine the optimal target cash balance by minimizing total costs.

Question 9

What are the key inputs required for the Baumol model?

Answer 9

Fixed cost of selling securities (F), total cash needed (T), and opportunity cost of holding cash (R).

Question 10

Name two limitations of the Baumol model.

Answer 10

Assumes constant disbursement rate and no cash receipts during the period.

Question 11

How does the Miller-Orr model differ from the Baumol model?

Answer 11

It deals with fluctuating cash inflows and outflows and uses control limits (U and L).

Question 12

What are the steps to apply the Miller-Orr model?

Answer 12

Set the lower limit (L), estimate standard deviation of daily cash flows, determine the interest rate, and estimate trading costs. Then you calculate Z* and U*.

Question 13

What is the difference between book cash and bank cash?

Answer 13

The difference is called float, representing the net effect of transactions in the process of collection.

Question 14

How has Electronic Data Interchange (EDI) impacted float?

Answer 14

It has shortened or nearly eliminated float by enabling direct transactions.