1 / 6

Reasons for Holding Cash 19.1

Reasons for Holding Cash 19.1. LO1. Speculative motive – hold cash to take advantage of unexpected opportunities Precautionary motive – hold cash in case of emergencies Transaction motive – hold cash to pay the day-to-day bills

johnmadison
Download Presentation

Reasons for Holding Cash 19.1

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Reasons for Holding Cash 19.1 LO1 • Speculative motive – hold cash to take advantage of unexpected opportunities • Precautionary motive – hold cash in case of emergencies • Transaction motive – hold cash to pay the day-to-day bills • Trade-off between opportunity cost of holding cash relative to the transaction cost of converting marketable securities to cash for transactions

  2. Understanding Float 19.3 LO1 • Float – difference between cash balance recorded in the cash account and the cash balance recorded at the bank • Disbursement float • Generated when a firm writes cheques • Available balance at bank – book balance > 0

  3. Understanding Float - Continued LO1 • Collection float • Cheques received increase book balance before the bank credits the account • Available balance at bank – book balance < 0 • Net float = disbursement float + collection float

  4. Quick Quiz I LO1 • You have $3000 in your chequing account. You just deposited $2000 and wrote a cheque for $2500. • What is the disbursement float? • What is the collection float? • What is the net float? • What is your book balance? • What is your available bank balance?

  5. Example: Measuring Float LO1 • Size of float depends on the dollar amount and the time delay • Delay = mailing time + processing delay + availability delay • Suppose you mail a cheque for $1000 and it takes 3 days to reach its destination, 1 day to process and 1 day before the bank will make the cash available • What is the average daily float (assuming 30 day months)? • Method 1: (3+1+1)(1000)/30 = 166.67 • Method 2: (5/30)(1000) + (25/30)(0) = 166.67

  6. Example: Cost of Float LO1 • Cost of float – opportunity cost of not being able to use the money • Suppose the average daily float is $3 million with a weighted average delay of 5 days. • What is the total amount unavailable to earn interest? • 5*3 million = 15 million • What is the NPV of a project that could reduce the delay by 3 days if the cost is $8 million? • Immediate cash inflow = 3*3 million = 9 million • NPV = 9 – 8 = $1 million

More Related