boken kap 27 del 2 Flashcards
What is a sweep account?
An account where excess funds are automatically invested at the end of each business day.
Name three reasons why firms have temporary cash surpluses.
To finance seasonal activities, planned expenditures, and unanticipated contingencies.
What is the trade-off in determining the target cash balance?
The trade-off is between the opportunity costs of holding too much cash and the trading costs of holding too little.
Where is the optimal cash balance found?
At the minimum point of the total cost curve.
What happens when the cash balance reaches the upper limit (U) or lower limit (L)?
If it reaches U, the firm buys U-Z units of securities; if it reaches L, the firm sells Z-L units to return to the target cash balance (Z).
What assumption does the target cash balance model make about daily net cash flows?
That they are normally distributed.
What is Electronic Data Interchange (EDI)?
Direct electronic information exchange between businesses.
What are Treasury bills?
Government obligations with a maximum maturity of 360 days.
How do Treasury notes and bonds differ from Treasury bills?
They have maturities of more than one year.
What is commercial paper?
Short-term securities issued by finance companies, banks, and corporations.
What are Certificates of Deposit (CDs)?
Short-term loans to commercial banks.
What are three factors to consider when setting a credit period?
The probability the customer will not pay, the size of the account, and the perishability of goods.
Why are cash discounts offered?
To speed up the collection of receivables.
