SU 6: Managing Current Assets Flashcards
Optimal Cash Balance
Square root of 2(Fixed cost per transaction)(Total demand for cash for the period)/Interest rate on marketable securities
Cash Management Motives
- Transactional
- Precautionary
- Speculative
Benefit of receiving cash early
Daily cash receipts x Days of reduced float x Opportunity cost of funds
Zero-Balance Account
At the end of each processing day, the bank transfers just enough from the firm’s master account to cover all checks presented against the ZBA that day
Repurchase Agreement
A means for dealers in government securities to finance their portfolios.
Bankers’ Acceptances
Drafts drawn by a non financial firm on deposits at a bank
Average Collection Period
Derived by weighting the collection period for each group of receivables by it’s collection percentage
Average Collection Period Calculation
Days in year/Accounts receivable turnover
Average Balance in Receivables
Daily credit sales x Avg. Collection period
Accounts receivable turnover (using dollars)
Annual net credit sales/Average balance in receivables
Average Balance in Receivables for the year
Annual credit sales x (Avg. collection period/Days in year)
Accounts Receivable Turnover (using days)
Days in year/Average collection period
Increased Investment in Receivables
Incremental variable costs x Incremental avg. collection period/Days in year
Cost of Change in Credit Terms
Increased investment in receivables x Opportunity cost of funds
Benefit/Loss from a change in credit terms
Incremental CM - Cost of change
Cost related to Inventory
Purchase costs + Carrying costs + Ordering costs + Stockout costs
Carrying Cost of Inventory
Storage, insurance, opportunity costs
Economic Order Quantity (EOQ)
Square root of 2(Variable cost per PO)(Periodic demand in units)/Periodic carrying costs per unit
Reorder Point
(Average daily demand x Lead time in days) + Safety stock
Cost of Inventory
(Invoice amount + Shipping) x Cost of capital + Insurance
Cost of Not Taking a Discount
Discount %/100% - Discount % x Days in year/Total payment period - Discount period
Cost of Carrying Safety Stock
Expected Stockout costs + Carrying cost
Effective Interest Rate
Net interest expense/Usable funds
Amount Needed
Invoice amount x (1.0 - Discount %)
Effective Rate on Discounted Loans
Stated rate/(1.0-Stated rate)
Effective Rate with Comp. Balance
Stated rate/(1.0-Compensating balance %)
Total Borrowings (Comp. Balance)
(Invoice amount x 1.0 - Discount %)/(1.0 - Compensating balance %)
Lines of Credit with Commitment Fees
(Avg. Balance x Stater rate) + [(Credit limit - Avg. Balance) x Commitment fee %]
