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Chapter 19 - Cash and Marketable Securities Management. Ó 2005, Pearson Prentice Hall. Liquid Asset Management. CASH - motives for holding cash: Transactions : to meet cash needs that arise from doing business. Precautionary : having cash on hand for unexpected needs.
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Chapter 19 -Cash and Marketable Securities Management Ó 2005, Pearson Prentice Hall
Liquid Asset Management CASH- motives for holding cash: • Transactions: to meet cash needs that arise from doing business. • Precautionary: having cash on hand for unexpected needs. • Speculative: to take advantage of potential profit-making situations.
Cash Management CASH:
Cash Management CASH: Trade Off: cash decreases risk of insolvency, but earns no returns!
Cash Management CASH:
Cash Management CASH: Objectives:
Cash Management CASH: Objectives: • have enough cash on hand to meet disbursal needs.
Cash Management CASH: Objectives: • have enough cash on hand to meet disbursal needs. • minimize investment in idle cash balances.
Cash Management Managing Cash Inflow • Reducing Float can speed up cash receipts. • Mail Float: length of time from the moment a customer mails a check until the firm begins to process it. • Processing Float: the time required by a firm to process a check before it can be deposited in a bank.
Cash Management Managing Cash Inflow • Reducing Float can speed up cash receipts.
Cash Management Managing Cash Inflow • Reducing Float can speed up cash receipts. • Transit Float: time required for a check to clear through the banking system and become usable funds.
Cash Management Managing Cash Inflow • Reducing Float can speed up cash receipts. • Transit Float: time required for a check to clear through the banking system and become usable funds. • Disbursing Float: occurs because funds are available in a firm’s bank account until its payment check has cleared through the banking system.
Cash Management Managing Cash Inflow • Lockbox System Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box. A commercial bank collects and deposits the checks.
Cash Management Managing Cash Inflow Lockbox System • Instead of mailing checks to the firm, customers mail checks to a nearby P.O. Box. • A commercial bank collects and deposits the checks. This reduces mail float, processing float and transit float.
Cash Management Lockbox System benefits: • Increased working cash - reduces time required to convert receivables to cash. • Elimination of clerical functions - bank handles receiving, endorsing, totaling and depositing. • Early knowledge of dishonored checks - firm learns of customers’ bad checks faster.
Cash Management Managing Cash Inflow Preauthorized Checks (PACs) • Arrangement that allows firms to create checks to collect payments directly from customer accounts.
Cash Management Managing Cash Inflow Preauthorized Checks (PACs) • Arrangement that allows firms to create checks to collect payments directly from customer accounts. This reduces mail float and processing float.
Cash Management PAC System benefits: • Highly predictable cash flows. • Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs. • Customer preference - eliminates regular billing for customers. • Increased working cash - dramatically reduces mail float and processing float.
Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs)
Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs) • Moves cash from local banks to concentration bank accounts.
Cash Management Managing Cash Inflow Depository Transfer Checks (DTCs) • Moves cash from local banks to concentration bank accounts. • Firms avoid having idle cash in multiple banks in different regions of the country.
Cash Management DTC System benefits: • Lower levels of excess cash. • Reduced expenses - eliminates billing and postage costs; reduces clerical processing costs. • Customer preference - eliminates regular billing for customers. • Increased working cash - dramatically reduces mail float and processing float.
Cash Management Managing Cash Inflow Wire Transfers • Moves cash quickly between banks. • Eliminates transit float.
Cash Management Managing Cash Outflow Zero Balance Accounts (ZBAs) • Different divisions of a firm may write checks from their own ZBA. • Division accounts then have negative balances. • Cash is transferred daily from the firm’s master account to restore the zero balance. • Allows more control over cash outflows.
Cash Management Managing Cash Outflow Payable-Through Drafts (PTDs) • Allows the firm to examine checks written by the firm’s regional units. • Checks are passed on to the firm, which can stop payment if necessary.
Cash Management Managing Cash Outflow Remote Disbursing • Firm writes checks on a bank in a distant town. • This extends disbursing float. • (Discouraged by the Federal Reserve System)
Marketable Securities Considerations • Financial Risk - uncertainty of expected returns due to changes in issuer’s ability to pay. • Interest rate risk - uncertainty of expected returns due to changes in interest rates.
Marketable Securities Considerations • Liquidity - ability to transform securities into cash. • Taxability - taxability of interest income and capital gains. • Yield - influenced by the previous four considerations.
Marketable Securities Types • Treasury Bills - short-term securities issued by the U.S. government.
Marketable Securities Types
Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including:
Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including: • Federal National Mortgage Association (Fannie Mae)
Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including: • Federal National Mortgage Association (Fannie Mae) • Federal Home Loan Banks
Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including: • Federal National Mortgage Association (Fannie Mae) • Federal Home Loan Banks • Federal Land Banks
Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including: • Federal National Mortgage Association (Fannie Mae) • Federal Home Loan Banks • Federal Land Banks • Federal Intermediate Credit Banks
Marketable Securities Types • Federal Agency Securities - Debt issued by agencies, including: • Federal National Mortgage Association (Fannie Mae) • Federal Home Loan Banks • Federal Land Banks • Federal Intermediate Credit Banks • Banks for the Cooperatives
Marketable Securities Types • Bankers’ Acceptances - short-term securities used in international trade. Sold on discount basis. • Negotiable CDs - short-term securities issued by banks, with typical deposits of $100,000, $500,000 and $1 million.
Marketable Securities Types • Commercial Paper - short-term unsecured “IOUs” sold by large reputable firms to raise cash. • Repurchase Agreements - an investor acquires short-term securities subject to a commitment from a bank to repurchase the securities on a specific date.
Marketable Securities Types • Money Market Mutual Funds - a pool of money market securities, divided into shares, which are sold to investors.