Chapter 4 - Cash management and working capital finance

Question 1

What are the motives for holding cash?

Answer 1

TPS

• Transaction
• Precautionary
• Speculation

Question 2

What are transaction motives?

Answer 2

Day to day purposes

Question 3

What are precautionary motives?

Answer 3

For expenses such as repairs

Question 4

What are speculation motives?

Answer 4

Investment opportunities

Question 5

What does the Baumol model calculate?

Answer 5

Optimal amount of cash to transfer to current account

Question 6

What are the drawbacks of the Baumol model?

Answer 6

• Difficult to predict amounts required in future periods

- Assumes cash used at constant rate

Question 7

What does the Miller-Orr model calculate?

Answer 7

Cash variability through establishing upper and lower limits.

Question 8

How does the Miller-Orr model work?

Answer 8

• When the upper limit is reached securities are bought to reduce cash to the return point.
• When the lower limit is reached securities are sold to increase cash to the return point.

Question 9

What are permanent current assets?

Answer 9

The minimum current asset base required for normal trading activity e.g. inventory, receivables

Question 10

What are fluctuating current assets?

Answer 10

The variation in current assets during a period e.g. seasonal variations

Question 11

Does an aggressive working capital strategy use short term or long term finance?

Answer 11

Short-term for fluctuating current assets and some permanent assets