Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionVII. Short−Term Financial
Planning and Management- Cash and Liquidity
Management
© The McGraw−Hill^723
Companies, 2002day, on average, are needed to make the system profitable for Bumper Crop?
Treasury bills are currently yielding 5 percent per year.- Concentration Banking Mojo Corporation currently employs a lockbox sys-
tem with collection centers in San Francisco, St. Louis, Atlanta, and Boston.
Each lockbox center, on average, handles $150,000 in payments every day.
Mojo’s current policy is to invest these payments in short-term marketable secu-
rities daily at the collection center banks. Every two weeks, the investment ac-
counts are swept and the proceeds are wire-transferred to Mojo’s headquarters in
Dallas to meet the company’s payroll. The investment accounts pay .015 percent
per day, and wire transfers cost .15 percent of the amount transferred.
a.What is Mojo’s total net cash flow available from its lockbox system to meet
the payroll?
b.Suppose Late Nite Bank, located just outside Dallas, offers to set up a con-
centration bank system for Mojo. Late Nite will accept each of the lockbox
center’s daily payments via automated clearinghouse, ACH, transfers (in lieu
of wire transfers) and deposit the funds in the same marketable securities in-
vestments yielding .015 percent per day. ACH-transferred funds are not
available for use for one day. If the ACH transfers cost $700 each, should
Mojo proceed with the concentration bank plan?
c. In part (b), at what cost of ACH transfers would Mojo be indifferent between
the two systems?
20.1 Commercial Paper Chevron sells commercial paper to interested institutional
investors. Go to the Chevron web site at http://www.chevron.com, follow the “In-
vestors” link and the “Commercial Paper” link. What is the credit rating for
Chevron’s commercial paper? Now follow the link for the commercial paper and
find the “Offering Memorandum” link. What is the minimum size Chevron will
sell? What size do they request for one- to four-day commercial paper?
20.2 Commercial Paper Rates What are the highest and lowest historical interest
rates for commercial paper? Go to http://www.economagic.comand follow the “Inter-
est Rates” link. Find the highest and lowest interest rates for one-, two-, and
three-month nonfinancial commercial paper over the time reported. When did
they occur?
20.3 ACH Services One provider of float reduction services is ePayment Systems.
You can find their web site at http://www.epaymentsystems.com. Follow the “Ser-
vices” link and then the “Electronic Check Conversion” link. What does an elec-
tronic check conversion accomplish? How does the system work? How long
does it take for the funds to be deposited in the merchant’s account?Spreadsheet Templates20–3, 20–5, 20–6, 20–8DETERMINING THE TARGET CASH BALANCE
Based on our general discussion of current assets in the previous chapter, the target
cash balanceinvolves a trade-off between the opportunity costs of holding too much
cash (the carrying costs) and the costs of holding too little (the shortage costs, also696 PART SEVEN Short-Term Financial Planning and Management
Challenge
(Question 13)
What’s On
the Web?A B C D
E F G H
321
654
987
112110
1143Using a spreadsheet for time value oIf we invest $ 25 ,0 (^00) at 1 (^2) percent, howf m lonog uney calculations
RaFutePture (rforser taen Vtethae V) uluaelu (fvnek (pn)owv)n of periods s,o we use the fomranl Ntil wPeER h (ravaet^ $e, p^50 m,^0 t^00 , p?v Wfv)e need to solve
ThPe ferioods:
rmal entered in cell B 10 is = NPER: notic
has a negaivte sign on it. Also notice that rate is een tetharte pdm astd is zeecimro aal, nnd (^) otth aat pv
percentage.
$ 5 $^2005 ,0,0 0000
6 .1 1625. 512
20A
target cash balance
A firm’s desired cash
level as determined by
the trade-off between
carrying costs and
shortage costs.
Basic
(continued)