WCPM - Cash and Funding

Question 1

Baulmol Model

Answer 1

SQRT of 2CoD/Ch

Shows you the optimum amount of cash to invest in an interest account

Question 2

Co
D
Ch

Answer 2

Co = transaction cost/commission
D = excess cash generated over the period
Ch = cost of holding cash e.g. Interest rate

Question 3

Transactions per year Baulmol

Answer 3

Demand/optimum investment

Question 4

Cash Forecasting Proforma

Answer 4

Income first:
Receivables
Loan

Expenditure next:
Raw materials
Variable costs
Machine/fixed costs

THEN:
Opening cash balance
net cash flow
Closing cash balance - becomes next month opening cash balance!!

Question 5

Miller Orr Model usage

Answer 5

Sets the target cash balance but incorporates uncertainty in cash inflows and outflows

Lower limit = set by management upon how much risk a cash shortfall the firm is willing to accept - depends on access to borrowings and if the business can accept a shortfall

If hits upper limit = invest
If hits lower limit = supplement by using deposit account or selling securities

Question 6

Miller Orr Calculations

Answer 6

Lower Limit = given in question
Upper limit = lower limit + spread
Return point = lower limit + (1/3*spread)