Principles of corporate finance 6th brealey myers chapter 31

Principles of Corporate Finance Brealey and Myers  Sixth Edition Cash Management Slides by Matthew Will Irwin/McGraw Hill Chapter 31 ©The McGraw-Hill Companies, Inc., 200 31- Topics Covered  Inventories and Cash Balances  Cash Collection and Disbursement Systems  Float  Bank Relations Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- Inventories & Cash Balances Economic Order Quantity - Order size that minimizes total inventory costs Economic Order Quantity = Irwin/McGraw Hill x annual sales x cost per order carrying cost ©The McGraw-Hill Companies, Inc., 200 31- Inventories & Cash Balances Determination of optimal order size Inventory costs, dollars Total costs Carrying costs Total order costs Optimal order size Irwin/McGraw Hill Order size ©The McGraw-Hill Companies, Inc., 200 31- Inventories & Cash Balances  The optimal amount of short term securities sold to raise cash will be higher when annual cash outflows are higher and when the cost per sale of securities is higher Conversely, the initial cash balance falls when the interest is higher Initial cash balance = Irwin/McGraw Hill x annual cash outflows x cost per sale of securities interest rate ©The McGraw-Hill Companies, Inc., 200 31- Inventories & Cash Balances  Money Market - market for short term financial assets  commercial paper  certificates of deposit  repurchase agreements Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- Inventories & Cash Balances Cash (Everyman’s Bookstore) balance ($000) 25 Average 12.5 inventory Weeks Value of bills sold = Q = x annual cash disbursement x cost per sale interest rate x 1260 x 20 08 Irwin/McGraw Hill = = 25 ©The McGraw-Hill Companies, Inc., 200 31- Float  Time exists between the moment a check is written and the moment the funds are deposited in the recipient’s account  This time spread is called Float Payment Float - Checks written by a company that have not yet cleared Availability Float - Checks already deposited that have not yet cleared Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- Float Payment Float illustration - The company issues a $200,000 check that has not yet cleared Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 10 Float Payment Float illustration - The company issues a $200,000 check that has not yet cleared Company’s ledger balance $800,000 Irwin/McGraw Hill + Payment float $200,000 ©The McGraw-Hill Companies, Inc., 200 31- 11 Float Payment Float illustration - The company issues a $200,000 check that has not yet cleared Company’s ledger balance $800,000 Payment float + $200,000 equals Bank’s ledger balance $1,000,000 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 12 Float Availability Float illustration - The company deposits a $100,000 check that has not yet cleared Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 13 Float Availability Float illustration - The company deposits a $100,000 check that has not yet cleared Company’s ledger balance $900,000 Irwin/McGraw Hill + Payment float $200,000 ©The McGraw-Hill Companies, Inc., 200 31- 14 Float Availability Float illustration - The company deposits a $100,000 check that has not yet cleared Company’s ledger balance $900,000 Payment float + $200,000 equals Bank’s ledger balance $1,100,000 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 15 Float Net Float illustration Net float = payment float - availability float Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 16 Float Net Float illustration Net float = payment float - availability float Bank’s ledger balance $1,100,000 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 17 Float Net Float illustration Net float = payment float - availability float Bank’s ledger balance $1,100,000 equals Available balance $1,000,000 Irwin/McGraw Hill + Availability float $100,000 ©The McGraw-Hill Companies, Inc., 200 31- 18 Managing Float  Payers attempt to create delays in the check clearing process  Recipients attempt to remove delays in the check clearing process  Sources of delay  Time it takes to mail check  Time for recipient to process check  Time for bank to clear check Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 19 Managing Float Check mailed Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 20 Managing Float Check mailed Mail float Check received Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 21 Managing Float Check mailed Mail float Check received Processing float Check deposited Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- 22 Managing Float Check mailed Mail float Check received Processing float Availability float Cash available to recipient Irwin/McGraw Hill Check deposited Presentation float Check charged to payer’s account ©The McGraw-Hill Companies, Inc., 200 31- 23 Managing Float Concentration Banking - system whereby customers make payments to a regional collection center which transfers the funds to a principal bank Lock-Box System - System whereby customers send payments to a post office box and a local bank collects and processes checks Zero-Balance Accounts - Regional bank accounts to which just enough funds are transferred daily to pay each day’s bills Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 ... Inc., 200 31- Inventories & Cash Balances  The optimal amount of short term securities sold to raise cash will be higher when annual cash outflows are higher and when the cost per sale of securities... sale of securities interest rate ©The McGraw-Hill Companies, Inc., 200 31- Inventories & Cash Balances  Money Market - market for short term financial assets  commercial paper  certificates of. . .31- Topics Covered  Inventories and Cash Balances  Cash Collection and Disbursement Systems  Float  Bank Relations Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 31- Inventories