Corporation Finance CH19

reasons for holding cash • Transaction motive – hold cash to pay the day-to-day bills• Precautionary motive – hold cash in case of emergencies• Speculative motive – hold cash to take advantage of unexpected opportunities• Trade-off between opportunity cost of holding cash relative to the transaction cost of converting marketable securities to cash for transactions
float difference between book cash and bank cash
• Disbursement float ▪ Generated when a firm writes checks▪ Available balance at bank – book balance > 0s eliminated when payments are made electronically
Collection float ▪ Checks received increase book balance before the bank credits the account▪ Available balance at bank – book balance < 0can be avoided by collecting payments electronically at the time of sale
• Net float = disbursement float(positive amount) + collection float(negative amount)is equal to the firms available balance minus its book balance
cost of float opportunity cost of not being able to use the money
Cash Concentration refers to the procedures to accumulate the cash in the company’s primary bank accounts.
Lockbox post office box strategicaly located so that a firms receivables can be collected faster
Zero-balance account An account into which funds are deposited only in an amount equal to the value of the check presented for a payment that day
Controlled disbursement account an account into which a firm transfers funds, usually from a master account, in an amount sufficient to cover the checks presented for payment that day
GT Motors regularly issues short-term debt to finance its daily operations. Suddenly, the credit markets froze and no funds were available for borrowing. Fortunately, the firm had some cash reserves saved that it was able to use to fund its operations until additional credit was available. The need to retain cash for situations such as this is which one of the following motives for holding cash? precautionary
Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor. DLK is a sole proprietorship. An unexpected family situation has caused the owner to suddenly want to retire and relocate closer to his family. Thus, the assets of DLK are being offered to RB Enterprises at a bargain basement price. While RB Enterprises had not anticipated purchasing these assets, it was decided that the opportunity was too good to pass up. This illustrates which of the following needs to hold cash? speculative
transaction motive – hold cash to pay the day-to-day bills
Precautionary motive hold cash in case of emergencies
speculative motive hold cash to take advantage of unexpected opportunities

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