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2005, Pearson Prentice Hall

Chapter 19 - Cash and Marketable

Securities Management

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Liquid Asset Management

CASH- motives for holding cash:

Transactions: to meet cash needs thatarise from doing business.

Precautionary: having cash on hand for

unexpected needs.

Speculative: to take advantage of

potential profit-making situations.

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Cash Management

CASH:

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Cash Management

CASH:

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Cash Management

CASH:

Objectives:

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Cash Management

CASH:

Objectives:

have enough cash on hand to meet

disbursal needs.

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Cash Management

CASH:

Objectives:

have enough cash on hand to meet

disbursal needs. minimize investment in idle cash

balances.

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Cash Management

Managing Cash I nf low

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.

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Cash Management

Managing Cash I nf low

Reducing Float can speed up cash

receipts.

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Cash Management

Managing Cash I nf low

Reducing Float can speed up cash

receipts.

Transit Float: time required for a

check to clear through the banking

system and become usable funds.

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Cash Management

Managing Cash I nf low

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 firms bank

account until its payment check has

cleared through the banking system.

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Cash Management

Managing Cash I nf low

Lockbox System

Instead of mailing checks to the firm,customers mail checks to a nearby P.O.

Box.

A commercial bank collects and depositsthe checks.

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Cash Management

Managing Cash I nf low

Lockbox System

Instead of mailing checks to the firm,customers mail checks to a nearby P.O.

Box.

A commercial bank collects and depositsthe checks.

This reduces mail float, processing float

and transit float.

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Cash Management

Lockbox System benef its: 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 checksfaster.

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Cash Management

Managing Cash I nf low

Preauthorized Checks (PACs)

Arrangement that allows firms to createchecks to collect payments directly from

customer accounts.

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Cash Management

Managing Cash I nf low

Preauthorized Checks (PACs)

Arrangement that allows firms to createchecks to collect payments directly from

customer accounts.

This reduces mail float and processing

float.

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Cash Management

PAC System benef its: Highly predictable cash flows.

Reduced expenses- eliminates

billing and postage costs; reducesclerical processing costs.

Customer preference- eliminates

regular billing for customers. Increased working cash -

dramatically reduces mail float andprocessing float.

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Cash Management

Managing Cash I nf low

Depository Transfer Checks

(DTCs)

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Cash Management

Managing Cash I nf low

Depository Transfer Checks

(DTCs) Moves cash from local banks to

concentration bank accounts.

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Cash Management

Managing Cash I nf low

Depository Transfer Checks

(DTCs) Moves cash from local banks to

concentration bank accounts.

Firms avoid having idle cash inmultiple banks in different regions of

the country.

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Cash Management

DTC System benef i ts:

Lower levels of excess cash.

Reduced expenses- eliminates billingand postage costs; reduces clerical

processing costs.

Customer preference- eliminatesregular billing for customers.

Increased working cash - dramatically

reduces mail float and processing float.

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Cash Management

Managing Cash I nf low

Wire Transfers

Moves cash quickly between banks.

Eliminates transit float.

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Cash Management

Managing Cash Outf low

Zero Balance Accounts (ZBAs) Different divisions of a firm may write

checks from their own ZBA.

Division accounts then have negativebalances.

Cash is transferred daily from the firmsmaster account to restore the zero balance.

Allows more control over cash outflows.

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Cash Management

Managing Cash Outf low

Payable-Through Drafts (PTDs)

Allows the firm to examine checkswritten by the firms regional units.

Checks are passed on to the firm, which

can stop payment if necessary.

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Cash Management

Managing Cash Outf low

Remote Disbursing

Firm writes checks on a bank in a distanttown.

This extends disbursing float.

(Discouraged by the Federal ReserveSystem)

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Marketable Securities

Considerations

Financial Risk- uncertainty of

expected returns due to changes inissuers ability to pay.

Interest rate risk- uncertainty of

expected returns due to changes in

interest rates.

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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.

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Marketable Securities

Types

Federal Agency Securities- Debt

issued by agencies, including:

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Marketable Securities

Types

Federal Agency Securities- Debt

issued by agencies, including:

Federal National Mortgage Association

(Fannie Mae)

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Marketable Securities

Types

Federal Agency Securities- Debt

issued by agencies, including:

Federal National Mortgage Association

(Fannie Mae)

Federal Home Loan Banks

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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

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Marketable Securities

Types

Bankers Acceptances- short-term

securities used in international

trade. Sold on discount basis.

Negotiable CDs- short-term

securities issued by banks, withtypical deposits of $100,000,

$500,000 and $1 million.

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Marketable Securities

Types

Commercial Paper- short-termunsecured IOUs sold by large

reputable firms to raise cash. Repurchase Agreements- an

investor acquires short-term

securities subject to a commitmentfrom a bank to repurchase thesecurities on a specific date.

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Marketable Securities

Types

Money Market Mutual Funds - a

pool of money market securities,

divided into shares,

which are sold to

investors.